India will shield more of its bonds from foreign ownership, in a sign it’s uncomfortable with the billions of dollars of inflows linked to the inclusion of its debt in a key global index.
Overseas investors will no longer be able to freely buy freshly issued Indian government bonds with 14-year and 30-year tenors, according to a statement by the central bank. The change is effective immediately, the Reserve Bank of India said, without citing a reason.
The move comes a month after JPMorgan Chase began including Indian government securities in its main emerging market index, and amid increased volatility in global markets caused by election results and central banks adjusting policy.
The country’s joining the gauge marked a significant milestone, offering global investors improved access to one of the best-performing but tightly regulated debt markets, with one of the lowest foreign ownership ratios among emerging economies.
“It’s a bit of a surprise announcement. It’s also not very clear why the bank has chosen to exclude those two securities,” Neeraj Gambhir, group executive for treasury, markets & wholesale banking products at Axis Bank told Bloomberg Television on Tuesday (Jul 30). However, given that the pool of securities available to foreigners is quite large, “as far as the index-related flows are concerned, I don’t think it should have a material impact on it.”
Authorities might amend the rules for issuance of such securities to curb hot money flows and volatility, Bloomberg reported last week, citing a top finance ministry official.
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A spokeswoman for JPMorgan declined to comment when asked by Bloomberg whether the July 29 directive would lead to a change in the composition of securities included its index. The RBI did not immediately respond to Bloomberg’s request for comment.
India’s local-currency bonds are the top performers in emerging Asian this year, handing investors a return of 8.1%, data compiled by Bloomberg show. The yield on India’s existing 30-year security was little changed on Tuesday.
Global funds have poured more than US$12 billion into freely accessible bonds since India’s index inclusion of was announced in September. The RBI has bought up dollars coming in, with its foreign exchange reserves swelling to a record, in order to keep the rupee on an even keel.
Goldman Sachs Group and others have estimated that India’s accession to the gauge would attract flows of as much as US$40 billion. The country’s weight will progressively rise to 10%.
Long wary of the kind of capital flows that led to the Asian financial crisis, India opened a swath of its sovereign bond market to overseas investors in 2020. Having removed Russian bonds from its widely-tracked indexes following the 2022 invasion of Ukraine, JPMorgan announced India’s inclusion last September.
But unlike China, which made a number of changes changes to its debt market before joining the Wall Street bank’s gauge in 2020, New Delhi has balked at tax changes for foreigners that would have facilitated the trading of Indian debt on international platforms such as Euroclear.
“It does point to the fact that the government continues to be reluctant to encourage foreign bond inflows,” said Shamaila Khan, UBS Asset Management’s head of fixed income for emerging markets and Asia Pacific. BLOOMBERG
