Govt bonds' JP Morgan index inclusion to boost rupee, help finance CAD: CEA

Fiscal, monetary policies will need to be cognizant of global perceptions and sensitivities, says Nageswaran

The inclusion of Indian government bonds in JP Morgan's emerging market debt index is expected to broaden India's investor base, potentially appreciate the rupee, and make it easier for Indian financial institutions to lend money, Chief Economic Advisor V Anantha Nageswaran said on Friday. The move is also likely to simplify financing of the current account deficit (CAD) while reducing government borrowing costs, he said.

Nageswaran, however, also stressed that India's fiscal and monetary policies would need to be cognizant of global perceptions and sensitivities. Increased foreign holdings could introduce volatility in the Indian bond market or currency during times of global uncertainty, even if these fluctuations were unrelated to Indian macroeconomic fundamentals, he observed.

"By and large, at this stage, we welcome this development as the advantages of index inclusion seem to outweigh the potential drawbacks and challenges that other countries are also facing," said Nageswaran during a virtual press briefing.

While the exact impact on the government's borrowing costs remains unclear, the CEA said: "The Indian bond market is already robust, and the cost of capital is quite reasonable. The costs might even come down somewhat further."

He cautioned that while foreign investors were increasingly interested in India due to its stable macroeconomic policies, this influx of investment should not threaten India's macroeconomic stability. "Macro-prudential policies will become increasingly crucial down the line, if they are not already."

Nageswaran also suggested that increased demand for government bonds denominated in rupees could lead to a nominal appreciation of the rupee. "This presents both an opportunity and a challenge. We must ensure that the rupee remains competitive."

He further noted that it was inevitable that external events causing financial market volatility worldwide would affect India's government securities (G-sec) yields and currency. "Investors will be reacting to global developments in their portfolios and adjust their exposure to the Indian market accordingly. Such responses are to be expected," he said.

According to Nageswaran, the Indian government bond market is the third-largest among emerging economies, following China and Brazil. However, foreign ownership currently stands at less than 2 per cent, among the lowest compared to other emerging markets. "This low rate of foreign ownership is because India has been an exception among major emerging markets in not featuring in global bond indices. This inclusion will rectify that anomaly."

Calling the question on volatility in the Indian market a hypothetical one, the CEA said: “We are used to handling volatility. Our central bank is well-experienced in managing currency and interest-rate volatility.”