Global Bonds-Debt investors can look forward to rewarding times!

Debt Investors-India might be very soon be included in JP Morgan’s ‘GBI-EM’ global bond index that tracks global debt bonds issued by governments of emerging countries. In fact India is the only major Emerging Market (EM) which is not included in any global bond indices. While the equity markets were opened to the Foreign Institutional Investors (FIIs) in 1993, bond markets were not due to the government’s cautious approach because of the potential impact on the currency.

India’s inclusion will attract a lot of foreign money to its capital markets (as much as $30 billion in 10 years, as per projections). For example, as on August 2022, ”The GBI-EM index” was made up of bonds from China, Indonesia, Thailand, Malaysia, Brazil, Mexico, and South Africa and the index’s performance directly depended on how these underlying debt securities performed. If this bond index had done well in the last few months, global investors would have turned their attention and would have been interested in investing money in the bonds that make up the index. So the governments of these 7 countries have a higher chance of receiving foreign money. 

India recently overtook the UK to become the fifth largest economy in the world and is on track to be the third largest economy by 2030. In the equity market, India is the fifth biggest country, and India’s$1 trillion sovereign bond market is one of the largest among emerging-market economies. Given that India has a different economic structure, including it in the index would be beneficial. Besides, India has been on the watchlist of index managers like JP Morgan, FTSE, etc.

Though, on the flip-side the problem comes in when investors consider aspects like settlement and taxability, but Russia’s exclusion/ exit from the JP Morgan’s ‘GBI-EM’ index has left a vacuum in the index and which could act as a trigger for the index managers to replace it with the Indian bonds, helping them to ‘re-balance’ their index.

In the recent past, as in case of equity markets, FPIs have been withdrawing their funds from the Indian debt capital markets for the last few months. In August 2022, the trend reversed and foreign funds invested $538 million in Indian bonds as the news of Indian bonds being included in the global index made a buzz. India’s inclusion in the indices could help India immensely in terms of foreign flows.

Though the current inflow stands at $18 billion (Rs 143,703 crore), the inflow could increase to $30 billion (Rs 239,506 crore) in the next fiscal year, in addition to $15-18 billion annually thereafter. Resultantly, India’s debt will make up 10% of the index, which is the highest among any other emerging country (click here).

The foreign ownership of Indian bonds would increase from 2% to 9% by 2031 & Morgan Stanley expects about $170 billion (Rs 13,57,147 crore) in bond inflows.Positive impact of India’s probable inclusion shall be lowering of the Global Bond yields resulting into reduced cost of capital, thereby creating a new source of capital especially for infrastructure funding.

For the debt investors it is a clear opportunity to realign their portfolios and consider funds with high GSec (government bonds) component, which eliminate credit-risk (one of the two risks in debt investing). Besides, if the investments are made through Target Maturity funds (TMFs) then even the other risk – interest rate risk – can be managed, leaving the investors in a ‘win-win’ situation with regards their debt

investments. In fact there could be a possibility of capital gains due to a fall in the bond yields upon their inclusion in the GBI-EM. To top it all, the investor shall always have the advantage of lower taxation due to the benefit of indexation, over a period of three years and longer.