The Centre will not factor in any potential inflows from the listing of certain categories of government securities on overseas bond indices when it finalises its borrowing calendar for the second half of this fiscal later this month, an official source told FE.
This indicates the much-awaited listing of G-sec on global bond indices is unlikely to take place in 2022, if not in FY23.
JP Morgan reportedly began fresh talks with investors recently about adding India to its emerging market index. This raised expectations of an imminent listing of the country’s securities.
In March, the government announced its plan to borrow Rs8.45 trillion from the market through dated securities in the first half of FY23. It has pegged FY23 gross market borrowing at Rs 14.31 trillion (after adjusting for the conversion of short-term maturities into long-dated bonds).
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Morgan Stanley last year estimated that $40 billion would flow into Indian government bonds after the inclusion into two of the three global indices —Bloomberg Global Aggregate Index and JPM GBI-EM Global Diversified Index. On an average, $18.5 billion in annual inflows will take place over the next decade. This would push foreign ownership of Indian government papers, currently less than 2%, to 9% by 2031.
It has been in talks with JP Morgan and Bloomberg-Barclays for listing its bonds on overseas indices. It’s also discussing clearing and settlement issues with Euroclear. However, India’s reluctance to scrap capital gains tax on such transactions or freeze it at a certain level, fears about greater capital outflows during tough times and preference for local settlement of securities are among the issues that are still being worked out.
Bonds listed on global indices are usually settled via international platforms, including Euroclear, outside a country’s borders. Sources had earlier said that Euroclear had been pushing India to exempt the transactions from taxes, citing the fact that other countries, too, follow similar policy.
The listing plan is aimed at not just financing a portion of the country’s elevated fiscal deficit in the aftermath of the Covid-19 outbreak but deepening its bond market. The move would potentially draw higher foreign flows, as many overseas funds track global indices.
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Endorsing the decision, some analysts have argued that since the country has to prepare for an extended period of limited liquidity, with advanced economies focussed on inflation control, it makes sense to tap fresh avenues for foreign fund flow. As the government is the biggest borrower in the system, it should ensure that all these avenues are kept open.
However, while conceding the benefits of the listing, others, including government officials, want to examine in detail the adverse fallout of any such action when going gets tough for the economy. “In such a situation, it can also lead to massive capital outflows. So, the pros and cons are being carefully weighed,” said another source.
As more foreign capital flows into Indian government bonds, the yield curve—or difference in short-term and long-term yields—could flatten by 50 basis points, according to Morgan Stanley. If added, India could represent 9.2% of the JPM GBI-EM Global Diversified Index, making it the second-largest country in that benchmark, after China, it added in a note last year.
The benchmark 10-year Indian government bond yield has been easing a tad in recent weeks. It ended at 7.23% on Friday, having dropped from 7.32% in the first week of August.
