Global bond index inclusion to bring turning point for India: Morgan Stanley

The global bond inclusion 'will push India’s BoP into a structural-surplus zone, indirectly create an environment for a lower cost of capital and ultimately be positive for growth, Morgan Stanley said (Photo: AP)

India is likely to be added to the global bond indexes by the first quarter of 2022, which would lure $40 billion of inflows to the country’s debt market in the next two years, according to Morgan Stanley.

“Foreign ownership of Indian government bonds has been declining, but 2022 would be the turning point that could bring an acceleration of bond inflows," Morgan Stanley strategists led by Min Dai, wrote in a note. The inclusion in global bond indexes should bring $18.5b in inflows every year over the next decade, compared to just $36.4b in the last ten years.

India has been striving to get its sovereign bonds included in the famed global bond indexes to lure foreign inflows and reduce the chronic budget deficit, which widened to a record in the fiscal year ended March as the coronavirus weighed on the economy. 

The global bond inclusion “will push India’s balance of payments into a structural-surplus zone, indirectly create an environment for a lower cost of capital and ultimately be positive for growth," according to Morgan Stanley.

Here are some more thoughts from Morgan Stanley:

  • Structural surplus in balance of payments and better productivity could drive 2% appreciation per year in the rupee’s real effective exchange rate
  • Foreign inflows could flatten India’s sovereign bond curve by 50 bps, recommend going long 10-year bonds, targeting 5.85% yield level
  • “A historically steep curve suggests enough risk premium being in the price and foreign demand could drive the curve flatter"
  • The inflows would also reduce India’s borrowing cost and improve its debt sustainability, helping retain its investment grade rating
  • Banks to benefit from stronger growth and lower borrowing costs; private banks, particularly large ones, should be key beneficiaries. Among non-bank financials, potential beneficiaries are likely to be HDFC Ltd., Bajaj Finance, SBI Cards, Mahindra Finance and Cholamandalam Finance.

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