GBI EM Index
Current Situation:
- India is now on the verge of becoming a sought-after investment location and a major force in the world economy.
- India has now been added to JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) index.
Regarding the inclusion of government bonds in GBI-EM:
- There will be about 20 Indian government bonds that are eligible for listing, with a total notional value of $330 billion.
- “Once India is included in the third key bond indices, total flows might reach $45-50 billion over the course of the next 12 to 15 months.
- Actual annual flows, however, may differ based on the macro dynamics and pace of both active and passive flows.
Will India’s participation in these indices follow naturally from this PM Index inclusion?
- The FTSE EM Index and the Bloomberg Barclays EM bond index are two more noteworthy global bond indices.
- Additionally, there are stricter procedural requirements and conditions that could be dependent on overcoming operational challenges including custody and settlement, understanding taxation, and Euroclear.
- There is no disputing, however, that once Indian government bonds are included in the aforementioned benchmark bond index, it will stimulate greater capital inflows and impart positive momentum.
What does this inclusion therefore imply?
- First off, it is well known that India imports a lot of goods.
- What is underappreciated, though, is that India imports a significant amount of money from across the world, making its economic cycles more susceptible to swings in global capital markets generally, and in the US interest rates and the value of the dollar in particular.
- Second, by supplying an alternative source of funding, the action will assist loosen the restrictions on financing India’s twin deficits—the fiscal and current account deficits. It would structurally assist in reducing the risk premiums and funding costs in India, which have long been a source of concern for borrowers.
- Additionally, it will broaden G-Sec ownership, deepen India’s bond markets, boost liquidity, and relieve yield pressure.
- The currency rates table will be developed, which will lessen the investment barrier for FIIs in India. The increased investor confidence that results will be beneficial for the Indian currency.
- “Third, corporates will gain because the yield curve as a whole will budge downward, lowering the cost of financing over time.
- Due to the current bullish attitude and flow momentum, corporate bond spreads will decrease and stay under control.
- Fourth, the commercial banking industry won’t be under as much pressure to take on the bulk of the government bonds, giving the balance sheets more room to lend to the needy private sector sectors of the economy.
- Fifth, India is currently making progress towards creating the infrastructure it urgently needs. For the manufacturing-led “growth ambitions” to be realised, this is crucial for building the infrastructure foundation.
- Bond inclusion can be a source of long-term sustainable source of financing through investment in government securities because public debt has increased more quickly and lagged the savings rate.
- Importantly, the timing of inclusion and the economic backdrop are intriguing. The global climate has become more hostile, and the US Fed has maintained its hawkish stance. Another US government shutdown is imminent, which might be risky for the markets.
- Additionally, the geopolitical environment and global trade are still unpredictable.
- Whether India will automatically be entitled to significant resulting inflows as a result of its inclusion in the global indices.
- No, the underlying macroeconomic situation will always be more important, and there are still difficulties to be aware of.
- One reason is that after the announcement of inclusion in the bond index, attention will immediately turn to government finances and fiscal responsibility.
- Importantly, this is a critical time since five state elections and then the general election will not overload India’s electoral schedule.
- The fisc is having trouble with rising crude oil prices, making it harder to provide assistance through price reductions on petrol or diesel or other sops.
- As was evident throughout the global financial crisis and the taper tantrum episodes, relying on foreign capital to finance domestic deficits implies enormous macro risks.
- The inclusion will also increase the volatility of the Indian debt markets and link them to the whims of passive flows, which distribute money according to the weights given by the index provider.
- The capacity to clear and settle Indian debt on a global platform like Euroclear, the repatriation of funds, and tax complications like eliminating or lowering the capital gains tax relative to what domestic investors would pay must also be resolved.
Conclusion:
- As a result, the continuous reform process, better market access, and transparency will shape and accelerate the nation’s integration into international markets, opening the door for a landscape of unmatched market development, long-term capital inflows, and cutting-edge financial products.
