Exclusive: India considers measures to protect bond markets from any jarring withdrawals following index inclusion

 Exclusive: India considers measures to protect bond markets from any jarring withdrawals following index inclusion

It is anticipated that the inclusion of Indian government bonds in JPMorgan's global indices in June will generate billions of dollars. However, the authorities are worried about the effects of potential massive outflows.

It is anticipated that the inclusion of Indian government bonds in JPMorgan's global indices in June will generate billions of dollars. However, the Centre and the Reserve Bank of India (RBI) are considering steps or a mechanism to mitigate any negative consequences of the same on the local debt market once sovereign bonds become a part of these global indices starting June 2024. This is because authorities are worried about the impact of potentially large and sudden outflows.

A person with intimate knowledge of the situation claimed that the restrictions could aim to "restrict inflows". "Even if this will only become apparent later, around 2025, we are talking about how to deal with worries of abrupt outflows due to anticipation of larger inflows with the introduction of global bonds. However, there is a lot of discussion in this area.

The insider told Moneycontrol that although India hasn't compromised its sovereign rights or taxes standards to gain inclusion, concerns regarding hot money are still very much present.

In its Government Bond Index-Emerging Markets (GBI-EM) global index suite, JPMorgan Chase & Co. announced on September 22 that it would begin including Indian government bonds in June 2024. By March 2025, India's weight in the index will have gradually increased to 10%.

According to economists, the amount of inflows as a result of this move will total $24 billion over the course of ten months. The impact that abrupt, sizable outflows could have on financial markets is still a concern for Indian regulators, despite the fact that investors watching global bond indices are viewed as long-term and reliable.

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Given the inability of India to control the withdrawal of foreign portfolio investors from government securities under the Fully Automatic Route (FAR), which only includes bonds maturing after 2026, one method to mitigate the effects of any sudden outflows could be a mechanism to "restrict inflows" initially, the source suggested.

Due to the early stages of the conversations, the person declined to go into further detail about the specifics of the limits under consideration. Emails and messages sent to the finance ministry and the RBI requesting comment on the situation were not returned.

The FAR category, which the RBI announced in March 2020, permits non-residents to invest without restrictions in specific government assets. FPIs barely hold 2.5% of the FAR securities currently valued at Rs 28.5 lakh crore. In 2024–2025, this number is projected to rise.

The inclusion of India in the global bond indices is anticipated to stimulate demand for its sovereign debt and drive down bond yields to as low as 6.5 percent, but some market participants have expressed concern that it will also draw more attention to domestic policies from the rest of the world.

Also Read: Sajjid Chinoy from JPMorgan believes RBI's FX policy shouldn't change as a result of bond index inclusion.

The government would need to monitor what overseas investors believe about domestic policies going forward, chief economist V Anantha Nageswaran noted on September 22. Even unrelated happenings could have an impact on local markets, he added.

The government's top economist said, "That is something we need to be prepared for and also think about," adding that it wasn't necessary that bond or foreign exchange market volatility would rise as a result of India joining global bond indices.

And we are accustomed to handling volatility, if there is increasing volatility. Our central bank has a great deal of experience controlling the volatility of exchange rates and interest rates, he added.

To be sure, there are some "speed breakers" to foreign inflows due to the lack of tax breaks and the absence of a practical platform like Euroclear in the settlement process. However, worries have also been raised regarding "Ivy League-educated fund managers" reacting collectively and hastily to statements made by significant international organizations like the International Monetary Fund. These fund managers may not have first-hand experience of India.