Statsguru: Six charts explain India's entry into global bond indices

The buzz about India’s entry into global bond indices has never been stronger.

There are hopes of inclusion in JPMorgan’s Government Bond Index-Emerging Markets Global Diversified (GBI-EM), besides other indices. A Russia-sized gap in the index after the Ukraine war is said to have made index providers more amenable to solve niggling issues including over capital gains and the use of Euroclear as a financial intermediary.

India is expected to have a 10 per cent weightage in the index compared to 8 per cent for Russia. Some of the existing emerging markets, such as Brazil, could see a small decline in their weights (chart 1).

Around $300 billion in assets track the index. This would mean inflows into India could be about $30 billion. This is significantly higher than the entire existing foreign holdings in government securities (chart 2). The inflows would also mark a departure from the trend of relatively limited foreign flows into India’s bond market compared to the equity market. Foreign portfolio investors have been net buyers worth $14.8 billion since 2018-19 in equity market, while they have been net sellers in the debt market (chart 3).

Such inflows during a volatile global situation are expected to support the rupee and help lower the cost of borrowing, which had been moving up amid tighter liquidity conditions (chart 4).

Foreign investors held a smaller share of government securities as of September than they did in March (chart 5). Inclusion in the index may reverse that trend, though actual capital flows may take a few quarters to materialise, according to a recent Morgan Stanley report.

An earlier report had pointed out that foreign ownership of corporate debt also picked up after China opened up its onshore bond market in 2017. Foreign ownership in India’s corporate bond market is currently even lower than that of government securities (chart 6).
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