Global index inclusion yet to reflect on Gsec yields

The rupee also remained range bound and closed with a gain of 0.04 paise at 83.55 to the greenback.
Global index inclusion yet to reflect on Gsec yields

MUMBAI: Though the much-anticipated inclusion of the government bonds (G-secs) in the JP Morgan’s emerging market bond index from last Friday has underwhelmed the market with muted response, both in terms of inflows as well as in the flat bond yields. In the long-run this is going to a game-changer for the finance street, say both bond dealers and analysts.

After closing flat on the D-day at 7.02% after rising to 7.1% in initial trade, the benchmark bonds closed 0.01% down on Tuesday, the third day since the inclusion at 7.012%, something nothing to write home about. The rupee also remained range bound and closed with a gain of 0.04 paise at 83.55 to the greenback.

For one, the bond inclusion will bring down the borrowing cost both for government and corporates both directly and indirectly. Secondly, it will increase foreign fund flows, which many peg it at least $25 billion by March 2025 and thus boost the rupee. Increased forex flow can boost the already-record high forex reserves as well as help bridge the current account deficit. But on the negative side, hot money inflows can raise inflation pressure, which RBI has been fighting since May 2022 with limited success.

Announcing the inclusion, JP Morgan on September 21, 2023 said it will be staggered over a 10-month period beginning June 28 to March 31, 2025, indicating 1% increment on its index weighting. That drew the curtains over the decade-long negotiations that the then Reserve Bank governor Raghuram Rajan started in 2013.

Though 38 bonds are under the fully accessible route (FAR), only 29 of them are eligible for the JP Morgan index which requires a face value of $1 billion and at least 30 months remaining maturity. These bonds combined have a valuation of Rs 27 trillion or around $330 billion. The total Gsecs market is closer to Rs 90 trillion.

On March 5, 2024, Bloomberg Index Services also announced inclusion of the G-secs in its emerging market local currency government index and related indices, beginning from January 31, 2025.

What’s Expected Inflows?

The inclusion is likely to bring in $2-$2.5 billion monthly fresh inflows or around $25 billion by March 2025 when the country’s weighting in the index is reaches the maximum threshold of 10 percent in the index, which will go a long way in bridging the current account gap. Higher weighting will allow foreign funds to allocate more monies to be invested in Indian debt.

Since the announcement last September, already $11.5 billion or about Rs 91,600 crore came to FAR bonds. As per Clearing Corporation data, foreign banks bought Rs 46,954 crore of G-secs from secondary market in June, while foreign portfolio investors lapped up `15,616 crore.

As per NSDL data, barring April 2024, all the months saw positive inflows varying from a low Rs 768 crore in September 2023 when the announcement was made to a high Rs 21,063 in January 2024 and Rs 19,759 crore in December 2023.

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