India's entry into global bond indices likely put off till FY24

India’s entry into global bond indices will happen later, possibly in FY24, because the conditions are not right now, said a government official.
 

The proposal — which was debated for months at various levels within the government — has been apparently held back at the senior level after considering all the alternatives. “There are some constraints other than tax treatment of capital gains, including the glide path on the fiscal deficit and the huge rise in our borrowings. It is difficult to offer the levels of comfort needed by pension and insurance fund investors who populate these indices,” said the official.

In the FY23 Budget, Finance Minister Nirmala Sitharaman was expected to announce a timetable for India’s entry into these indices. The bond market is in a tizzy in the absence of the announcement, driving up yields. The market concern is the space for the government to raise money is limited in the absence of measures to open up the sovereign debt market to global investors.

The Centre plans to borrow Rs 14.95 trillion in FY23, to which analysts are adding about another Rs 10 trillion by states because of the increased headroom.

Since the debt market is already awash with a massive inflow of bonds, Suyash Choudhary, head-fixed income at IDFC AMC, noted: “Some clarification on the path towards global bond index inclusion, most likely via rationalisation of capital gains tax for foreign investors was necessary…(but) in the post-Budget media interaction, finance ministry officials indicated that the discussions on capital gains seem to be still ongoing.”

 Sachs was hopeful of a 2023 inclusion. In a report it said: “With no mention of India’s inclusion in global bond indices in the Budget speech, we stick to our base case assumption of a likely announcement in Q4 2022 that India will be included in the GBI-EM Global Diversified Index, while actual inclusion will begin in early 2023.”

“Given this timeline, we think the bulk of the anticipated $30 billion inflows is more likely in 2023. But some active fund managers may start accumulating Indian bonds in 2022,” it added.

An entry into some of these indices would have partly taken off pressure on the government to finance its borrowing.

For more than two years, the department of economic affairs was in talks with fund managers to list India’s sovereign debt papers in some of the global bond indices. These, such as Bloomberg Barclays Global Aggregate Index and JP Morgan GBI EM index, are built as a market-weighted index of papers floated by global governments, government companies, corporates, and securitised fixed-income investments with maturities of at least more than one year.

The finance ministry had fine-tuned most of the issues regarding the announcement but it became evident in January that the initial cost of the inclusion could outweigh the benefits. It is in the middle of a balancing exercise between fiscal prudence and raising resources, and it was felt offering sops to foreign investors on capital gains and denying the same to domestic investors could send a wrong signal.

There was also the issue of a fiscal debt roadmap. In the last Budget, the finance minister had promised to bring an amendment in the FRBM (Fiscal Responsibility and Budget Management) Act to update India’s commitments but there has been no mention of it since. The document “Implementation of Budget announcement” tabled with Budget papers instead notes: “Given the pandemic-induced uncertainties, the government would continue with all efforts to attain a sustained and broad-based economic growth to protect lives/livelihoods of the people, while adhering to the path of fiscal rectitude already announced. Accordingly, a statement explaining deviation is laid along with the fiscal policy statement, before Parliament.”

But according to experts like Rahul Bajoria, MD & chief India economist, Barclays, sustained growth revival is more important to manage a large fiscal deficit than global bond indices’ inclusion. “While the markets were probably disappointed with the lack of news around this issue, inclusion in global bond indices is no silver bullet, and we believe that only sustained growth revival will help in smoothly managing the large fiscal borrowing,” Bajoria said.