JPMorgan is courting large investors to add India to its broadly tracked emerging market bond index, setting the stage for tens of billions of dollars in inflows as the country’s domestic market s open to foreign capital.
The Wall Street bank is seeking investor views on making a large portion of India’s Rs 1 trillion-dominated bond market eligible for inclusion in the GBI-EM Global Diversified debt index in local currency, according to two people familiar with the matter. It opened the consultation this summer with fund managers representing 85% of the $240 billion in assets under management that track the benchmark.
The decision to add Indian debt to one of the bank’s flagship indices would mark a turning point for global investors’ exposure to the world’s fifth-largest economy and the result of years of discussions between the government of ‘India, index providers and investors.
The consultation with asset managers comes as a growing chorus of investors and analysts are tipping India’s sovereign bonds for inclusion in the influential benchmark, a move that would generate about $30 billion in inflows of passive investors, according to Goldman Sachs.
“We think there is now a push from the investor side for inclusion,” said Jayesh Mehta, country treasurer for India at Bank of America. The Indian government’s distrust of hot money flows, which can quickly move in and out of markets, has also eased, Mehta added. “The government is convinced that the funds that come through the indices are more sticky.”
Danny Suwanapruti, head of Asia emerging markets currency and rates strategy at Goldman, said “it’s a win-win if they can make it work and the incentives are now more aligned to make that happen, so it becomes a matter of time.”
Suwanapruti forecast that about $270 billion of so-called fully accessible route sovereign bonds traded in India’s domestic market would be eligible for the GBI-EM index by 2023, with the country accounting for about one-tenth of the global reference index in its inclusion. “This would lead to about $30 billion in passive inflows . . . helping India finance its fiscal and current account deficit,” he said.
Indian government bonds rose on Friday after the Financial Times reported on the query, with the yield on the country’s 10-year debt falling 0.07 percentage points to 7.22 percent.
JPMorgan’s inquiry is expected to be completed next month, with the announcement of a formal proposal expected in October, according to people familiar with the matter. The bank declined to comment on the possible inclusion, as did India’s finance ministry.
India is not included in most other major bond indices, such as the Bloomberg Global Aggregate Index or the FTSE Emerging Markets Bond Index.
FTSE Russell placed Indian government bonds on a watchlist for possible inclusion in early 2021, but said in March that this status remained unchanged, although an upgrade is planned another assessment next month. FTSE Russell declined to comment on India’s valuation status.
The Reserve Bank of India introduced fully accessible route (FAR) bonds in March 2020, allowing foreign financial institutions to invest in rupee-denominated bonds without restrictions for the first time. It is this subset of Indian government FAR bonds that JPMorgan’s inquiry focuses on.
The prospect of foreign inflows has become more attractive in New Delhi since early 2020. While India did not engage in coronavirus stimulus measures as strongly as other major economies, its deficit fiscal reached record levels during the pandemic, increasing the need to expand its financing options.
“Post-Covid, our deficit has grown to such a level that funding is only domestic [negative] implications,” said a senior Mumbai-based banker.
One of the key stumbling blocks to previous pushes for inclusion has been where and how the bond trade should be settled, either outside India’s borders on a platform like Euroclear that is familiar to global financial institutions, or India, where investors should complete it. onerous registration procedures.
According to three senior Indian bankers familiar with the talks, the offshore settlement option was in fact vetoed by the Indian government last year due to problems with the administration of the capital gains tax, which would have hurt Indian investors.
Goldman’s Suwanapruti said the lack of agreement on a global platform was unlikely to derail the process, as it had not prevented the inclusion of either China or Indonesia. He added that while the time required to open a trading account in India would be “burdensome” for foreign investors new to the market, a longer lead time for inclusion in the benchmark index could help to solve it
Despite the growing expectation by much of the market of imminent inclusion, some bankers expressed doubts that approval would come so quickly.
“I think September would be too aggressive [for index inclusion]my feeling is maybe early next year,” said a senior banker.
Opinions also differ on the immediacy of investor demand for India’s inclusion, especially with rising interest rates in developed markets.
Another senior banker said: “Given the size of the Indian market and the Indian economy, there is a certain view from investors that, look, you have to find a way to bring India in.[to the indices]. . . but not necessarily today. In the medium term, I think there is enough investor sentiment.”
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