June 4, 2023

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Aprdn: Why inclusion in India’s bond index is a big event

Sovereign credit by Ken Akindev, leader of Asia abrdn

Indian sovereign bonds are expected to be included once in the global bond codes (in local currency). There has been a significant and expected change in local taxation. The indexation of Indian securities starting in 2022 will be a major milestone for global sustainable investment and will continue to deliver Significant benefits To India and investors in the years to come.

The primary formula for inclusion in the code

In its next budget for 2022-23, it is expected to be submitted by the Government of India in February 2022. An important tax deduction For uroclear settlements. Without going into too much technical detail, the tax change should make it more practical to settle Indian sovereign bond transactions through EuroClearce Clearinghouse. This Removing the previous key barrier For inclusion in the code. If Parliament passes the budget (including major financial revisions) in a timely manner, the process Adding Indian Bonds The index could start in March 2022.

Impact of indexing on flows

Morgan Stanley Has recently estimated that it will be listed on bond codes JP Morgan GBI-EM y Bloomberg Barclays Global Aggregate It will lead to $ 40 billion in capital inflows in 2022-23, followed by an annual inflow of $ 18.5 billion over the next decade. Although these amounts may seem large, they should be considered in context Sovereign bond market From India, it is relatively $ 1.1 trillion. In fact, it is noteworthy that Morgan Stanley estimates that even after the forecasts in the index, there is still a foreign-owned stake in Indian sovereign securities. Will be relatively 9% In 2031, albeit less than the current 2%.

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How India will benefit

Although the amount of forecasts received is low compared to the size of the market, the increase The existence of the code This should bring many financial and real economic benefits to India. Based on the balance of payments, the increase in the inflow of foreign securities will support the portfolio investment components. For example, the credit associated with the annual index would be equal to $ 18.5 billion Additional support In addition to the balance of payments of about 0.7% of GDP (3), the increase in index-linked inflows will provide some support for Indian foreign exchange reserves and the rupee.

Since all things being equal there must be a new source of additional need Press Yields are low on Indian government debt. This will reduce government capital expenditure and thus favor investment activity even in key development areas such as infrastructure and education. Most importantly, however, we hope that India can Greatly benefits Sending a strong signal of exposure to foreign capital and diversifying its securities base. In this sense, there is the argument that the ownership of foreign sovereign securities can be increased (compared to the current, more captive and exclusively domestic ownership). Help improve financial discipline.

How investors benefit

From the investor’s point of view, Advantages of Adding Indian Bonds In our opinion, global codes are particularly mandatory. At the most basic level, improving access to the large and liquid $ 1.1 trillion local government bond market is the third largest in Asia. Japan and China, Clearly considers the most significant expansion of the set of investment opportunities. However, only certain characteristics of the Indian market can be demonstrated More interesting For investors in global securities. In particular, we believe that the three positive qualities really stand out.

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First, Indian government securities have little contact with other regional and global bond markets, Actually maximizing the potential benefits of asset diversification. The well-known reason for this is India’s relatively low level of global economic integration, with 75% of its growth generated domestically. In our opinion, another significant factor Historically the lowest level of foreign ownership, Which contributed to the emergence of Indian bonds as completely immune from the large fluctuations in the sentiment of global investors. It should be noted that this has long been one of the arguments allowed within India More access Foreign investors to their bond markets. However, policymakers (exactly, in our opinion) will now conclude that limited transparency outweighs any such potential negativity.

Another major benefit to investors is the improvement in which they are listed on the Indian Securities Index Opportunity to express the largest and fastest growing economy by improving the basics. In this sense, there are many positive trends that can be cited. For example, factors such as improvement in the growth profile (aided by the 8-year record of reforms), strengthening the balance of payments, increased reliability of the central bank and a significant reduction in currency fluctuations. In fact, in some respects, we think it could be argued that the Government of India is indebted, despite the quality of the investment Very underrated Nowadays. For example, India has a lower sovereign credit rating than Italy, despite a 70 percent lower GDP ratio.

Lastly, the most attractive thing for investors in global fixed income, considering the long-term environment of very low global returns, is attractive. High performance Indian Bonds. In fact, as shown below, Indian domestic government bond yields of more than 6% for 10 years are favorably compared to many large, similarly valued emerging markets. Moreover, the rate of increase in yield compared to the 10 year treasury yield is about 1.5%, and the yield கட்டு, On the negative, will undoubtedly be a powerful attraction for many income-seeking investors around the world.

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10 Year Yield Comparison (%) on Selected Local Currency Emerging Market Government Bonds

Source: Bloomberg at the end of November 2021. * JPMorgan GPI-EM Global Diversified Code


Overall, the immediate inclusion of Indian government debt in the world’s leading local currency government indices should provide significant benefits to both issuers and investors. For the latter, in particular, we think of adding to the code Significant improvement in access to the bond market The largest, fastest growing economy with the best infrastructure in place. At the same time, it is associated with very attractive income and contacts Historically low With other parts of the global bond complex.