Global Bond Index Inclusion to Enhance ‘Indianisation’ of Hot Money

Sub: Eco

Sec: External Sector

Introduction:

India’s inclusion in global bond indices is expected to bolster the balance of payments (BoP) surplus and promote the ‘Indianisation’ of global hot money, according to SBI’s economic research team.

Key Developments:

In September, JP Morgan Chase announced that Indian Government Bonds (IGBs) would be included in its Emerging Market Index Global Diversified (GBI-EM GD) index starting June 28, 2024.
Monthly net inflows into FAR (Fully Accessible Route) securities have reached ₹90,000 crore from October 2023 to June 2024.

Expected Outcomes:

Post-inclusion, India’s weight in the index is expected to reach 10% in the GBI-EM Global Diversified index and approximately 8.7% in the GBI-EM Global index, potentially attracting passive flows of $20-22 billion by March 2025.
The decision to include India in the JPM GBI-EM index first is seen as a deliberate strategy by the Government/RBI to ensure smooth future developments.

Inflows from ETFs:

Once the Bloomberg Barclays EM bond index incorporates Indian bonds starting January 2025, fund flows are expected to increase further.
Global marquee ETFs (iShares, Vanguard, SPDR) modelled along these indices are anticipated to crowd in inflows.
Several global marquee funds, currently using proxies like total returns swaps and supranational bonds, have shown interest in directly entering the Indian market.

Competitive Edge:

This inclusion indicates the incremental Indianisation of global flows, positioning India to compete with China in the Asia Ex-Japan (AXJ) category.
With bond issuances in China totalling 71 trillion yuan (about $10 trillion) in 2023, India aims to become the second-largest bond market among emerging markets, overtaking Brazil.

Impact on Liquidity:

Significant foreign investment will enhance the depth of the government bond market and support system liquidity.
The liquidity situation, affected by the just-in-time mechanism and government surplus cash balances, might see some improvement.
However, primary liquidity from index inclusion flows is expected to be managed by the RBI to maintain stability.

Conclusion:

India’s ascent to the second-largest bond market among emerging markets could directly compete with China for fund allocations.
RBI’s management of debt and forex markets will be crucial in smoothing out any frictions and maintaining a strong foreign currency debt to GDP ratio, enhancing India’s case for a rating upgrade by major agencies.

Fully Accessible Route (FAR)

Launch Date: April 1, 2020
Purpose: Allows non-residents to invest in specified government bonds without restrictions.
Initiative: Opens certain categories of government bonds fully for non-resident investors.
Policy: Under FAR, eligible investors can invest in specified government securities without any investment ceilings.
Framework: FAR operates alongside existing routes such as the Medium Term Framework (MTF) and the Voluntary Retention Route (VRR).

Benefits:

Access: Substantially eases access for non-residents to Indian government securities markets.
Global Inclusion: Facilitates inclusion in global bond indices.
Foreign Investment: Attracts stable foreign investment in government bonds.

Voluntary Retention Route (VRR):

Purpose: Encourages Foreign Portfolio Investors (FPIs) for long-term investments in Indian debt markets.

Features:

Operational Flexibility: Provides operational flexibility and exemptions from certain regulatory requirements.
Retention Period: Requires a minimum retention period of three years, with FPIs maintaining a minimum of 75% of the allocated amount in India.
Investment Limits: Available on tap and allotted by the Clearing Corporation of India Ltd. (CCIL) on a ‘first come first served’ basis.