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Inclusion of Indian G-Secs in global bond indices may bring in significant, consistent inflows

ICICIdirect Research 30 Aug 2022 DISCLAIMER

What's Buzzing?

Indian bonds may be included in global bond indices resulting in significant inflows from foreign portfolio investors. The foreign inflows would help lower bonds yields along with the overall interest rate environment, which has otherwise been showing an upward trend in the last few months.

Context

Foreign portfolio investors have been net sellers in the last four years. They have sold off investments worth US$20 billion (bn) in the last three financial years (FY19-21). While the pressure on yields was not felt earlier, yields have been on the rise since the start of calendar year 2022 as interest rates rose across the globe in an environment of rising inflation. In the current environment, institutional buyers like foreign investors will help turn around the trend of rising bond yields in India.

According to The Economic Times, inclusion of Indian bonds in global indices like JP Morgan Emerging Market Index may be imminent as exclusion of Russia from the indices has opened up further space for inclusion of countries like India, which were anyway qualifying but for a few taxation issues along with other policy related issues. Inclusion would bring in estimated inflows of US$30-40 bn to India as investments made based on the composition of the index. The yearly inflows could be around US$10-20 bn every year. Earlier, during a stable debt flow environment like FY10-13, India received inflows of around US$7-8 bn. Therefore, FPI inflows through global indices route can be a source of significant incremental inflows and can help bring bonds yields lower on a structural basis.

Our Perspective

In India, major buyers of Government of India bonds are banks and financial institutions like insurance companies, RBI and foreign Investors. Historically, foreign flows have been very erratic and lack consistency. The inclusion of Government of India securities in global bond indices will provide the much needed consistency in foreign flows and help bring bond yields lower in a structural manner. It will also reduce the burden of RBI that has to manage the demand supply dynamics actively due to lack of consistent institutional buyers.

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