FPIs bat for India’s entry into global bond indices

Foreign portfolio investors (FPIs) have once again drummed up the cause of making India part of the global bond indices created by index providers such as JPMorgan.

This was done in recent interactions with the Securities and Exchange Board of India (Sebi), including during the latter’s roadshows to countries such as the US and the UK earlier this year. According to sources, Sebi has informally indicated to these investors that this is a difficult ask considering the apprehension around the volatility in the bond market such a move could bring.

It could not be ascertained if Sebi has formally communicated the FPIs’ request to the Reserve Bank of India (RBI) or to the government. An email sent to the RBI and Sebi did not get a response.

India had first begun talks with global index providers in 2013 but abandoned its plans to be included in their indices a year later over differences on removing restrictions on capital flows into the bond market.

According to experts, the government as well as the RBI may not be in favour of making a pitch for India’s entry into global bond indices at this juncture. Unlike in 2013, India is in a much better shape with regard to the stability of its currency and its current account deficit situation.

“In 2013, the currency was relatively weak and the country was on the brink of a ratings downgrade, which had prompted the government to think about easing limits in the bond market. The currency is a lot more stable now and we are seeing robust inflows into the debt market. So, there is no immediate need to relax the limits in the bond market,” said an expert who did not wish to be named.

Inclusion in global bond indices can potentially result in billions of dollars in incremental FPI flows and enable the FPIs to become more prominent investors in government securities (G-secs) and the corporate bond market.

“Increase in demand from an investor class could help in bringing down the borrowing cost of the government and have a positive impact on interest rates in general. It could also help in improving liquidity and volumes in the bond market,” said Ajay Manglunia, head–fixed income, Edelweiss Capital.

At present, India has hard limits imposed on the quantum of investments in G-secs and the corporate bond markets. This is a key deterrent for gaining an entry into any of the global bond indices. As of Monday, FPIs had utilised nearly 81 per cent of the total investment limit for G-secs and 85 per cent of the limit for the corporate bond market. In March, the RBI had raised the FPI limit on investment in government bonds by an aggregate ~17,000 crore for the April-June period.

The other hurdle for India’s inclusion is the restriction on the maturity of debt papers. In November last year, the RBI had allowed FPIs to invest in any kind of debt instrument, provided the residual maturity of the paper is three years and the proceeds are not used in real estate.

Foreign money, especially in the debt market, can be volatile during times of global turmoil, and wild swings can adversely impact the Indian rupee and bond yields. “The protective nature of the RBI reflected by the hard limits helps in keeping the all-important G-sec market immune to the vagaries of the FPIs. We have seen over and over again how countries which have high FPI holdings in government debt have suffered in times of global turmoil,” said Manglunia.

FPIs have pumped in $12.9 billion in the debt market in the year to date. In contrast, the year 2016 had seen net outflows of $6.4 billion.