Indian bonds set for a billion-dollar bath, will your portfolio soak it in?
The Indian bond market is set to see an upheaval in foreign investor portfolio inflows ranging from $20-30 billion because of changes in a key benchmark index.
J P Morgan, the global financial powerhouse, is expected to include India in the GBI-EM Global Diversified Index, following some changes to include the impact of withholding taxes on international investors.
What is the GBI-EM index?
The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments.
What’s the importance of the GBI-EM index?
The GBI-EM indices are used as benchmarks for bond performance in emerging markets.
For international investors, it's often impractical to monitor each market individually on a regular basis. Therefore, inclusion in an index serves as a beacon, making it easier to attract attention.
Is India’s inclusion in the index certain?
There may have been some false starts earlier, but not India’s inclusion in the global bond market seems certain.
The Economic Times reported that officials from the Reserve Bank of India were enquiring about the operational ability of some market intermediaries to handle investor inflows.
A regulator, like the RBI, making enquiries is equivalent to a pitch inspection ahead of a cricket match.
Will index inclusion lead to a rise in bond investments?
Analysts estimate that inclusion in the global index could funnel as much as $30 billion into India's bond market within the next 10 months and between $170 billion and $250 billion over the long term.
They also estimate that foreign ownership in Government Securities (G-Secs) could jump to 10%, up from the current sub-2% level.
More importantly, the development will see an improvement in liquidity for bonds, and this will lead to a deepening of the bond market.
Also, it could lead to a lowering of borrowing costs, and more money becomes available.
What delayed India’s inclusion in the index?
India has lifted restrictions on foreign ownership for certain bonds and enhanced trade reporting and margin requirement protocols to pave the way for global index inclusion.
However, India has made it clear that tax policies will remain unchanged.
The JP Morgan bond index is now expected to have provisions for factoring in the impact of withholding tax for foreign investors.
What’s in it for investors
A rise in demand for government securities could help banks, the most significant investors currently, to sell them at a profit.
It will also release more funds to banks, which can be used for giving loans.
Also, demand for bonds will rise as passive flows into debt will rise following inclusion in the bond index.
A rise in foreign portfolio investor inflows will lead to lower bond yields as bond prices rise, strengthening the rupee against the dollar and aiding India’s balance of payments.
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