Doves in Droves!
Indian debt market with foreign funds influx of US $ 30 billion after JP Morgan, Bloomberg indexation reflect confidence of global financial community
K.A.Badarinath
A quiet transformation that has gone less noticed in India is that of its debt market which is in for bigger overhaul.
Strong growth story, reforms in debt market, decisive leadership of Narendra Modi government have created fresh opportunities for foreign investors in the nascent debt market with potential and promise.
After over years of intense negotiations, Indian sovereign bonds will make it to Bloomberg and JP Morgan’s emerging markets index. Getting benchmarked on these two indices would lead to about $ 30 billion inflows into Indian debt paper that’s largely confined to government banks and financial institutions.
US bank J P Morgan recently announced inclusion of 23 government bonds worth $ 330 billion on its emerging markets index. This will be staggered out over ten months beginning June 28, 2024 to March 2025.
Close on the heels, Bloomberg Index Services has given firm hint that Indian bonds will be part of its indices globally. While Bloomberg reported discussions with its clients that are largely banks and investment companies, JP Morgan has more or less completed this exercise. As per reports, large investors in government debt internationally expected Bloomberg to include India bonds in first quarter of next fiscal in India beginning April 1, 2024.
Inclusion of Indian treasury issued rupee denominated bonds under fully accessible route (FAR) are part of JP Morgan and Bloomberg indices would lead to large global investors taking big exposure in Bharat’s paper.
Reserve Bank of India (RBI), Bharat’s central bank in consultation with Indian government had opened a new channel named, Fully accessible route (FAR), through which non-resident investors were permitted to invest in specified Indian securities without caps. This foreign investors’ window was formally opened in 2020.
In the indexation of JP Morgan and Bloomberg, Indian bonds are set to get maximum weightage of 10 points globally and 8.7 points in emerging markets indices.
India’s finance minister Nirmala Sitharaman is right on track when she says that stability, policy consistency and reforms has made Bharat’s famed growth story all the more robust and sustainable.
With emergence of India as a strong manufacturing hub for top companies like Apple, Nokia, Boeing, Samsung and Amazon, equity markets turned ebullient with fresh equities investments moving away from China.
A similar situation is getting unravelled in debt market with investors shifting away from China that’s struggling to keep its growth estimates in short and medium term positive and healthy given hiccups in the post-Covid 19 recovery. In contrast, India is expected to log fastest growth next two years with 6.1 per cent in 2023 as per International Monetary Fund. This weighs against US’s 1.8 per cent and global aggregate of 3 per cent.
China losing steam, Russia taken out of the indices following Ukraine war and healthy economic growth in India has egged foreign investment firms, rating agencies and large banks to look at Bharat’s debt paper eagerly.
Finance Minister Sitharaman may have been a wee bit conservative when she projected inflows of US $ 23 billion after inclusion of Indian debt paper on JP Morgan Bond Index. Goldman Sachs, the prominent US investment bank and services company, has however projected $ 30 billion in 2023-24 when top investors rebalance their exposure internationally.
Chinese debt paper was in demand way back in 2019. Of late, Chinese paper has begun to lose support given its shaky economic fundamentals that may translate into larger interest in Indian debt market. Hitherto, treasury debt paper was largely restricted to government owned banks and financial institutions while a very small chunk was available for retail investors and mutual funds.
Foreign investors seem to be factoring huge infrastructure investment plans rolled out by Narendra Modi government. And, second factor that may propel rebalancing their exposure is outcome of legislative assembly elections in five states followed by Parliament polls before June 2024.
Projected manifold increase in foreign funds flow into India debt paper goes well with ‘on the ascent’ narrative of Narendra Modi’s ruling BJP and its allies that have begun a spirited campaign ahead of states and federal elections.
No doubt that RBI and Indian government are experimenting big by enabling foreign investors to take large exposure in Indian paper. This may eventually translate into RBI losing some flexibility in money policy formulation and shifting to market-led dynamics.
One cannot ignore the contrarian view as well. Foreign investors taking exposure worth US $ 25 – 30 billion in government stock of over Rs 100 lakh crore or US $ 1.2 trillion is too little and too late. If one were to factor fresh borrowing of Rs 1.65 lakh crore each year, these inflows would add depth to the Indian debt market without having material impact on monetary policy formulation in near future.
Unanimous view however is the robustness, inclusiveness and sustainability of India’s growth story built on strong economic fundamentals. Financial community’s confidence in Indian story reaffirms that doves are back in droves.
(author is Director & Chief Executive at New Delhi based non-partisan think tank, Centre for Integrated and Holistic Studies)