RBI might not push bond index plan

With comfortable FX reserves now, and the need to avoid volatility in segment flows, logic in postponing the idea

The Reserve Bank of India (RBI)’s earlier plan for including Indian bonds in a global bond index might have been put on the back burner due to strong foreign exchange reserves.

According to the Street, the central bank might decide to again pursue the idea in a scenario where there is better domestic stability. For, such a step could lead to more volatile flows in the debt segment, a concern RBI is trying to mitigate.

"Adequate reserves have been built and the economy is back on track. Given the volatility or expected volatility with global capital flows which might come about as the US Fed begins normalising monetary policy, RBI could be waiting for better macroeconomic stability domestically and a little more resilience in the financial markets before taking a step like this. This is because such a step might lead to more volatile bond flows into the country. RBI might not want this volatility as of now,” said Suyash Choudhary, head, fixed income, IDFC Mutual Fund.

A bond index, also called a bond market index, is a method of measuring the value of a section of the bond market. It is computed from the prices of selected bonds (typically a weighted average). It is a tool used by investors and financial managers to describe the market and to compare the return on specific investments.

Such an index could comprise government securities, corporate bonds and high-yield bonds, among others. These indices give a sense of direction to investors, primarily institutional investors looking to buy or sell in the market.

RBI's forex reserves are above $300 billion, due to which experts believe India is comfortably placed if the US Fed announces further tapering of its bond buying programme. The Street believes RBI is also not comfortable raising the foreign institutional investment (FII) limit in debt. The overall limit for FII in government bonds is $30 bn.

To reduce volatile debt flows RBI has barred foreign investors from buying government debt with less than one year's maturity.

The FII limit for corporate debt is $51 bn and even in this case, RBI had cut the sub-limit for commercial papers to $2 bn from $3.5 bn earlier.

"Listing of bonds in a global index would require removal of the restrictions on capital inflows and there have been some differences in the industry over this proposal. Hence, the central bank might not be in a rush to go ahead with this proposal. Though there could be some movements post the election results,\" said the fixed income head of a private life insurer.

Talk of inclusion of India bonds in a global bond index had emerged when the rupee was on a depreciation spree last year and RBI did not have sufficient forex reserves to arrest the volatility.