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A decade in the making, India's global bond index inclusion journey finally ends

Talk of India entering into discussions to become a part of global bond indices had emerged in mid-2013 even as the economy battled the 'taper tantrums' that sank the Indian rupee to its (then) all-time low in late August. The country needed investors to be confident about its long-term growth prospects so that funds could flow in, bolster the currency, fill up the foreign exchange coffers, and stop the financial market meltdown amid eye-wateringly high inflation.

It was in these circumstances that newly-appointed Reserve Bank of India (RBI) governor Raghuram Rajan had said in his first post-monetary policy press conference that India had several issues to discuss with the "bond index people".

"We have to talk to them and see what we feel comfortable with and what they feel comfortable with and whether there is a meeting point. We will explore and see, based on what their conditions are," Rajan had said on September 20, 2013.

It is safe to say the talks have been long — for almost 10 years after Rajan's comments, in the early hours of September 22, JPMorgan announced India's inclusion in its Government Bond Index-Emerging Markets (GBI-EM) global index suite with effect from June 2024.

While the markets celebrated the widely-expected announcement — the benchmark 10-year government bond opened more than 50 paise higher at Rs 101.15 from its close on September 21 — the reaction of policymakers has been more sedate.

"It is a welcome development showing confidence in the Indian economy," Economic Affairs Secretary Ajay Seth said.

Chief Economic Adviser V Anantha Nageswaran also welcomed the development, but pointed out JPMorgan had "made this decision on their own".

Hot and cold relationship

The exuberance from finance ministry officials is considerably less compared to when foreign direct investment (FDI) is being discussed.

It's not as if the numbers are incomparable — in 2022-23, FDI into India was just over $71 billion. According to economists, inclusion in the JPMorgan index alone could lead to up to $25 billion of inflows in the government debt market in 2024-25. It's just that India had seemingly drawn a line in the sand that it was not willing to cross to become a member of these global bond indices.

Over the years, a bone of contention between India and index providers has been the tax treatment for gains made by foreign investors from the sale of Indian government bonds once they had been listed on the indices. India was against giving more favourable tax terms to overseas investors.

Would-be stakeholder Euroclear - a Belgium-based platform preferred by investors to settle securities transactions - opposes taxes on capital gains as calculating it poses issues for its systems. But being Euroclear-compatible is not mandatory to be listed on global bond indices.

"People would like to believe that India is desperate (to get listed on global bond indices), but we are not," a senior finance ministry official had told Moneycontrol in August 2022.

The lack of desperation from India's side had a lot to do with the economy's recovery following the mayhem caused by the taper tantrums. The best indicator here is the country's foreign exchange reserves, which hit an all-time high of $642 billion in September 2021 — a far cry from the dwindling $274 billion at the time Rajan took charge as RBI governor in September 2013.

Policymakers had also warned in recent months about the risks from being listed on these indices, chief among them being increased sensitivity of domestic policy to external factors, and the need for domestic fiscal and monetary policy to be more aware of global perception and sensitivities.

The fear of Ivy League-educated fund managers blindly reacting to what key global organisations such as the International Monetary Fund (IMF) said about India was also real. However, an inter-departmental group of the RBI made it clear in July this year that the benefits from getting Indian government bonds added to global indices outweighed the risks.

Reaping the benefits

Whether other index providers follow JPMorgan is up to them, but India's prospects definitely seem to have improved. If India becomes part of the Bloomberg Global Aggregate index, it could add another $10 billion worth of inflows.

Strikingly, the impetus from these bond index inclusions could tilt the scales in the delicate rope-walk the central government performs every year with its market borrowings.

"Total demand from these three segments alone — banks, investors, and index related flows — would account for more than 90 percent of the net supply in 2024-25. Hence demand for government securities could exceed supply by Rs 90,000 crore next year," Gaura Sen Gupta, India economist at IDFC First Bank, said in a note.

"The Indian government and its agencies usually mop up more than 60 percent of the available domestic capital. With additional foreign funds available through funds tracking the bond indexes, government borrowing may not crowd out private corporate borrowers as much as in the past. This will lead to a reduction in corporate bond yields," said Debopam Chaudhuri, the Piramal group's chief economist.


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