India to open its US$1 Trillion Government bond market

It is expected that the government will approve this plan by end of this year or early 2023

January 24, 2022

India is an attractive market due to high domestic ownership because of high domestic savings rates and low correlation to other EM bond markets

JPMorgan Chase, Morgan Stanley, and FTSE Russell have India on their watch-lists

Enhanced access to Indian debt might be valuable in protecting returns in an environment of rising international rates for investors in EM sovereign bonds

The country had allowed a new set of bonds to be fully eligible for foreign ownership in 2020

India is planning to open a US$1 trillion government bond market to more international investors, marking a landmark attempt to attract foreign investment since the country’s economic liberalization in 1991. Officials have spent months preparing to join global indexes and it is expected that the government will approve this plan by the end of this year or early 2023. Currently, foreign investors hold approximately 2% of all outstanding government securities and the Reserve Bank of India (RBI) has been disinclined to large debt inflows.

India is deemed as an attractive alternative to its regional counterparts due to high domestic ownership because of high domestic savings rates and low correlation to other emerging market (EM) bond markets. International banks such as JPMorgan Chase and FTSE Russell have India on their watch-lists and Morgan Stanley expects inclusion in some indexes as early as the second quarter of FY22. However, there is no estimated timeline for India’s inclusion in the Bloomberg Global Aggregate Index currently.

It must be noted that the capital gains tax on foreigners who invest in local debt has a cap of 6% on global ownership of government bonds. To remove such barriers, India allowed a new set of bonds to be fully eligible for foreign ownership in 2020. Although the RBI still considers international debt inflows as volatile, it has started loosening the monetary policy, posing a challenge to local debt investors. The central bank might increase the rates later this year as the economic recovery picks up.

It can be argued that inviting foreign investors holding government debt may add an added level of scrutiny to meeting fiscal deficit targets and could limit India’s spending on welfare programs. However, improved access to Indian debt might be valuable in protecting returns in an environment of rising international rates for investors in EM sovereign bonds. Whether compared against a portfolio of global bonds or EM bonds, experts believe that the Indian market has something significant to offer in terms of building diversified portfolios.