In a historic and big moment for investors in India, our country's govt bonds market got a major boost after the?US' biggest bank JPMorgan announced a huge decision recently.
JPMorgan Chase has become the first global index provider to include India's $1 trillion bond market on its emerging markets index. The decision sets the stage for billions of dollars of inflows just when the Indian bond market is straining under record government borrowings.
¡°This could be a push factor to prompt foreign inflows into India and foreign investors are likely to be more active in the Indian fixed-income market,¡± Morgan Stanley strategists led by Min Dai wrote in a note, calling the index inclusion a ¡°milestone event.¡±
The move boosts India¡¯s aspirations for a bigger global heft as it boasts one of the world¡¯s fastest rates of economic growth and positions itself as an alternative to China. At the same time, the inclusion will open up the nation¡¯s public finances to greater scrutiny from foreign investors, likely increasing the volatility of local markets, as per Bloomberg report.
The inclusion of Indian bonds into JPMorgan's index starts in phases from June 28th, 2024. India will reach a maximum of 10% weighting in JPMorgan¡¯s key emerging market index, which has $213 billion benchmarked to it.
Goldman Sachs Group Inc. expects inflows of more than $40 billion from active and passive funds over the next 18 months. The purchases will be ¡°front-loaded, beginning immediately, as investors pre-position for inclusion,¡± strategists led by Danny Suwanapruti wrote in a note Friday.
Foreign investors currently hold less than 2% of government securities. Officials have in the past worried about the consequences of outsized debt inflows, leaving local banks and mutual funds as the main buyers of bonds.
The need for providers to diversify constituents after Russia¡¯s exclusion from the index and worries about China trumped the reluctance on the Indian government¡¯s part to offer tax breaks to trade on global platforms.
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The index news ¡°should structurally augur well for rates and forex markets, leading to lower cost of borrowings for the economy and more accountable fiscal policy-making,¡± said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd, the report mentioned.
Kotak Mahindra Bank expects foreign ownership to rise to 3.5%-4% by the end of fiscal 2025, as investors plough money into a high-yielding market.?The entry of index investors should also open up room for local credit markets to expand, with companies not getting crowded out by government borrowings, Citigroup Inc. said in a note.
This is being seen as a keenly awaited move that could drive billions of foreign inflows to India's debt market.
As per Bloomberg, index inclusion follows ¡°the Indian government¡¯s introduction of the FAR program in 2020 and substantive market reforms for aiding foreign portfolio investments,¡± the team led by the firm¡¯s global head of index research, Gloria Kim, said in a statement. Almost three-quarters of benchmark investors surveyed were in favour of India¡¯s inclusion in the index, they said.
India¡¯s milestone is a stark contrast to many emerging-market peers, not least neighbouring China, whose economic woes and struggling financial markets have become a source of frustration for global investors. In fact, those troubles have only burnished India¡¯s appeal.
For the unversed, the RBI defines a bond as a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
As far?as government security is concerned, it?is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government¡¯s debt obligation. Such securities are short-term (usually called treasury bills, with original maturities of less than one year) or long-term (usually called Government bonds or dated securities with an original maturity of one year or more).?
In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
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