Bond inclusion benefits will play out in the long term: SBI MF CIO

The market was aware that during that latest round of consultations between index providers and investors

The inclusion of government bonds in the JP Morgan emerging market government bond index (GBI-EM) will lead to a new layer of demand for government securities, resulting in lower borrowing costs for the government, says Rajeev Radhakrishnan, chief investment officer (fixed income), SBI Mutual Fund. In an interview on the phone with Abhishek Kumar, Radhakrishnan highlights that g-sec papers under the fully accessible route (FAR) will see higher demand over the non-FAR g-secs of the same duration. Edited excerpts:

Did the bond inclusion come as a surprise for the markets?

It was expected. The markets were aware that during the latest round of consultation between index providers and investors, a larger set of investors favoured India’s inclusion. This is the reason why the bond markets didn’t react to some of the negative news recently, like the rise in crude oil prices. Also on Friday the yields hardly moved. This shows the inclusion was priced in.

How will it benefit the government and also domestic investors?

It is positive from a long term perspective because it adds a layer of demand for government securities. Higher inflows into these securities should lead to lower borrowing costs for the government, provided the broader macro parameters are stable. However, the impact will be limited in the near term. A lot will depend on the attractiveness of the overall emerging market. As of now, the rates are fairly attractive in the US itself with US treasury yields at over 5 per cent. The picture will change over time and the benefits of the inclusion will probably play out over the long term.

Will the benefits also trickle down to the corporate bond market?

I don’t think so. Corporate bond spreads in India are anyway tight. Wherever there are pockets of demand, if at all, money should have come in. There is no direct benefit for the corporate bond market from the inclusion.

Do you expect the inclusion to boost inflows from foreign active funds?

Once the passive flows start coming in consistently, active flows may also gather pace. But again it will depend largely on whether the environment is conducive for investment in emerging markets (EMs) and the attractiveness of the Indian market vis-à-vis other EMs. However, active fund flows can be erratic, leading to volatility in yields. In such a case, we will have to be prepared for such situations.

FPIs are a strong force in equity markets. Now as foreign flows start to gain pace in debt, can FPIs, over a period of time, also gain control over the debt market?

Government borrowing in India is almost completely funded by domestic investors. Foreign portfolio investment ownership, which is very low right now, may go up to some extent as these inclusions take place. Such a situation can be possible but it’s too early to predict right now. At least, in the coming five years I don’t see it happening. Domestic flows will continue to determine the direction of bond yields.