India likely to be part of top global bond index by early next year: Morgan Stanley

By Gopika Gopakumar
The RBI had said that it is working for the incorporation of local bonds into global bond indices to broaden the investor base. (Photo: Mint)

MUMBAI : India is likely to be included in one of the world’s top global bond indices early next year, Morgan Stanley said in a note on Wednesday. This could attract $170 billion to $250 billion in bond inflows over the next decade.

JPMorgan’s influential GBI-EM (government bond index - emerging markets) and Global Aggregate indices are likely to include India before February 2022. However, WGBI (world GBI) will not include India in the next few years, Morgan Stanley said.

“We expect one-off index inflows of $40 billion in 2022/23, followed by annual inflows of $18.5 billion in the next decade, pushing foreign ownership up to 9% by 2031," it said. Foreign ownership of Indian government bonds, which has been declining since 2018, is less than 2%.

According to Morgan Stanley, the inclusion in the global bond index could push the government to open its bond market further by removing foreign portfolio limits for all bonds in a bullish scenario. That said, the government will continue to keep inflation close to the target, which increases the real rates of IGBs (investment-grade bonds). The foreign brokerage expects the rupee to appreciate by 2% every year in REER (real effective exchange rate) terms.

The Reserve Bank of India would allow the rupee to appreciate in nominal terms because of a strong balance of payments, Morgan Stanley said. “We believe that foreigners could be attracted to buy IGBs in a significant amount because of high real rates and rupee appreciation," it said.

The central bank is working closely with the government to enable international settlement of government securities and incorporation of local bonds into global bond indices to broaden the investor base, RBI governor Shaktikanta Das had said at an event last week.

Since 2019, India has been working towards being included in global bond indices as rising government borrowing and a desire to push investment rates higher have necessitated opening up the domestic bond market to a broader investor base.

With increased foreign inflows, Morgan Stanley expects the central government deficit to reduce to 2.5% of GDP and consolidated deficit to reach 5% of GDP by FY29 from 14.4% in FY21.

Investors have been staying away from the Indian bond market in the past few years given the widening fiscal deficit, above-target inflation and gradually weakening currency. India would be the last major EM to join the global bond indices, following China’s path two years ago.

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