FTSE Russell, the world’s leading index provider, and a subsidiary of the London Stock Exchange Group, has retained India on its watchlist for inclusion in the FTSE Emerging Markets Government Bond Index (EMGBI).
FTSE Russell also said in its annual country classification review that it will consider upgrading the country to Market Accessibility Level 1. The index provider aims to reassess India in March 2023 for this.
The addition of India to the list of countries under consideration for a future upgrade to Market Accessibility Level 1 indicates greater ease of international entry to the domestic markets. India has been on the watchlist since 2020. As part of its aim to enter global bond indices, India lifted foreign investment restrictions on government securities in 2020.
FTSE Russell said in its review: “FTSE Russell continues to engage with its index users and Indian market authorities regarding ongoing market structure reforms, with a focus on securities that are available via the fully accessible route channel.”
“FTSE Russell acknowledges the considerable efforts that have been expended by many market participants to address the concerns of the international investment community, including the recent announcement confirming the extension of the custodian settlement cut-off to 07:30 IST on T+1. Despite the significant FTSE Russell | FTSE Equity Country Classification of Markets – September 2022 4 progress, FTSE Russell’s advisory committees remain concerned that foreign portfolio investors may need to pre-fund trades in Indian equities,” it added.
India was also placed on JP Morgan’s watch list for its emerging market index. The global bank, however, said that India must enhance market access, trading, and settlement for it to be included in the index. Capital gains tax seems to be the primary factor which is affecting India’s inclusion in Global bond indexes.
FTSE Russell’s primary concern is settlement and a functioning delivery payment system.
The review said: “The FTSE Equity Country Classification criteria for settlement requires a market to have a fully established and a functioning Delivery versus Payment (DvP) clearing system, with the absence of pre-funding. FTSE Russell will continue to monitor market developments and will seek to encourage and support the development of a workable solution. An update will be provided following the completion of the transition of all stocks to T+1, early in 2023.”
Advantages Of Global Bond Index Inclusion
At present, India is the only emerging economy, which is not part of any Global Bond Index.
Apparently, a huge gap in these Global Bond Index was created after Russia was excluded from the index following the invasion of Ukraine early this year. Russia had around 8-10 per cent weight in these indexes. So, now the banks which invest in these government bonds are looking to bridge this gap in their portfolio by investing in government bonds of emerging countries.
Consequently, India’s bond market will note a huge inflow of funds when it gets included in the Global Bond Index market. The rupee will appreciate, and this will boost the economy.
Says Hitesh Jain, lead analyst, institutional equities, Yes Securities: “India’s inclusion of government securities in global bond indices would lead to a stable rupee, given that you want to see foreign capital inflows in bond markets. The foreign portfolio investment (FPI) flows will augment the balance of payment (BoP) situation as well. Inflows also add to liquidity in the market, which makes it easier for corporates to borrow, and it is also good for the government for financing their fiscal shortfalls. If it is included, there could be $30-40 billion worth of inflows into the bond markets.”
Risks Associated With Giving FII Access To Indian Bonds
The primary risk associated with giving foreign investors access to investing in Indian government bonds is that if a crisis like a recession or war unfolds, these foreign institutional investors (FII) are likely to withdraw their investment before or during the crisis, which will have a severe impact on the Indian markets, and thus negatively impact the Indian rupee and the economy.
Hitesh adds: “When we have the inclusion of Indian bonds in global indices, we are subject to global volatility, and shocks emanating from policy normalisation or interest rate. Our bonds can turn volatile unlike the current scenario. We have seen quite a divergence in terms of bond yields and treasury yield movements in the US. Given the kind of interest rate shocks that we are seeing, rupee volatility can increase.”