Govt bonds to draw more global funds, cut borrowing cost
It took over a decade of efforts for Indian government bonds to get included in a global bond index. The discussions began in 2013, and over the next 10 years, the government removed one hurdle after another to finally convince JP Morgan, the largest bank in the US, to include Indian government bonds (G-secs) in its emerging market bond index. They will be included in June 2024, and over the next 10 months, the weightage of G-secs in the index would reach 10 percent. The inclusion is another step towards globalisation of the Indian financial market. While this is largely a positive development for India—ensuring stable foreign fund inflows, lower bond yields and a stronger rupee—it also means a closer scrutiny of government finances by global investors.
The JP Morgan GBI EM—which includes G-secs from China, Indonesia, Mexico, Brazil and Malaysia—is a benchmark used to invest $236 billion in global funds. A weightage of 10 percent might translate into $23.6 billion worth of foreign fund inflows into Indian G-secs by March 2025. It is also likely to trigger inclusion in other indices over the next few years, which might result in inflows of another $7-10 billion. In the medium term, Indian G-secs stand to attract $30-35 billion foreign inflows. This would mean lower borrowing costs for the government. The government will now have another steady source to finance its fiscal and trade deficits. Higher foreign inflows will make the Indian rupee stronger. Some foreign investors might start investing in G-secs ahead of the inclusion next June. This may shield the rupee against the impact of higher crude oil prices and equity market outflows.
More foreign funds also mean freeing up domestic funds for private sector lending. It’s estimated that the government sucks out three-fifths of domestic capital, leaving very little for Indian companies. Foreign inflows would free up some of this capital and make private sector borrowing cheaper. All this comes with its own risks. Higher exposure of foreign funds to Indian G-secs will raise the risk of massive outflows and inflows, increasing volatility in the bond and foreign exchange markets. The RBI and the government will have to deal with this. While the central bank would have to intervene more in the markets, the government will have to be on its toes to keep its fiscal house in order.