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Indian Debt market to witness favourable trends with inclusion in global bonds Index

ICICI Securities 02 Sep 2022

Global bond markets have been under pressure since last one year with yields rising as central bankers hike rates to combat multi decade high inflation. Indian bond markets have also seen similar pressure with yields rising almost 130-140bps albeit have relatively better behaved as compared to other global markets.

Globally, like equities which have global indices like MSCI which facilitate passive investments across countries, debt markets also have many indices which provide passive exposure to global bond market. In debt market, there many index providers with major ones being JP Morgan and Bloomberg-Barclays’s which provide wide range of indices from country specific indices to emerging markets indices to world indices. 

Since last few years, Indian Government has been trying to include Indian Government securities into these global bond indices which could provide stable inflows from long term investors. The foreign inflows would help lower bonds yields and overall interest rate environment which otherwise is showing upwards trend in last few months.

Foreign portfolio investors have been net sellers since last 4 years. They have sold off investments worth USD 20bn in last three financial years from FY 19 to FY21. While the pressure on yields was not felt earlier, yields have been on the rise since the start of the calendar year 2022 as interest rates rise across the globe on rising inflationary environment. In the current environment institutional buyers like foreign investors will help turn around the trend of rising bond yields in India.

As per economic times reports, inclusion of Indian bonds in global indices like JP Morgan Emerging Market Index may be imminent as exclusion of Russia from the indices have opened up further space for inclusion of countries like India which was anyway qualifying but for few taxation and other policy related issues. An inclusion would bring in estimated inflows of USD 30-40 billion to India as investments made based on the composition of the index. Earlier various estimates had suggested that inflows could be around USD 10-20 billion every year. Earlier during stable debt flow environment like FY10 to FY13, we have received inflows of around USD 7-8 bn. Therefore, the 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.

In India, the major buyers of Indian Government 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 Indian Government securities in global bond indices will provide the much needed consistency in foreign flows and will help bond yields lower in a structural manner. It will also reduce the burden from RBI who have to manage the demand supply dynamics actively due to lack of consistent institutional buyers.

Global bond indices inclusion can prove to be a major structural reform which may make foreign inflows into debt market regular and consistent just like equity markets. Foreign ownership of Indian debt market is currently miniscule and meaningful inflows and holding may structurally bring down yields and overall interest environment. The lower yields and interest rate environment could have a far reaching impact on the economy as well as on capital markets.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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