India’s inclusion in global bond Indices to boost balance of payments surplus: SBI

India’s inclusion in global bond indices will help supplement the balance of payments (BoP) surplus, while ensuring incremental ‘Indianisation’ of global "hot money", according to a latest report by SBI Research. "Shifting contours of portfolio funds allocation to multiple asset classes across different clusters of geographies, driven by strong currents of surging liquidity in an era of QT and pivot by Central Banks, positions India’s foray into global bond indices a win-win proposition, structurally strengthening the macros, credit markets and yield curve with benchmark likely to test 6.80% going ahead despite vagaries."

JP Morgan Chase, the largest U.S. commercial bank, announced the inclusion of Indian Government Bonds (IGBs) to its benchmark Emerging-market Index Global Diversified (GBI-EM GD) index in September last year. The index provider has added the securities starting June 28, 2024. Monthly net inflows into fully accessible route (FAR) securities have already touched ₹90,000 crore during October 2023-June 2024 post the announcement.

Only Indian government bonds issued by the Reserve Bank of India (RBI) under the FAR are included in the index. All FAR-designated Indian government bonds maturing after December 31, 2026 are eligible. The GBI-EM GD index had benchmarked assets under management of $213 billion as per the last publicly available data (Aug’23).

The report says India's weight, post inclusion, is expected to reach the maximum weight threshold of 10% in the GBI-EM Global Diversified, and around 8.7% in the GBI-EM Global index, ensuring likely passive flows of $20-22 billion at current AUM/holdings by March’25.

"We believe choosing the JPM GBI-EM first could be a deliberate move on the part of GoI/RBI to ensure future developments have a natural progression, evolving & maturing organically to mitigate possible points of friction along taxation/capital control."

The funds' flow numbers are also expected to inch-up after the Bloomberg Barclays EM bond index incorporates Indian bonds into its Bloomberg EM Local Currency Government indices starting January 2025. "There are already a host of marquee ETFs (iShares, Vanguard, SPDR) modelled along these benchmark indices that should further crowd in inflows."

Indian bonds also continue to remain on a watch list by another major index provider, FTSE Russell, which cited criteria around taxation, FPI registration and settlement process for Indian markets, for inclusion in its Emerging Markets Government Bond Index (EMGBI). "...the next annual revision due could put a strong case for the Index managers, with the FOMO (Fear of Missing Out) effect as global trading platforms like MarketAxess, Bloomberg and Tradeweb, working closely with CCIL, are now awaiting the RBI's approval for new launches," says SBI report.

The substantial foreign investment will enhance the government bond market depth and support system liquidity further, says the think tank. However, an increase in primary liquidity from index inclusion flows is expected to be drained out, it says. "We expect RBI’s deft handling of debt as also Fx markets to smoothen the frictions going forward while the Central Bank remains committed to protecting the foreign currency debt to GDP levels as India pitches for a strong case to major agencies to revisit the rating."