FTSE Russell has put India’s government bonds on the watchlist for potential inclusion in the FTSE Emerging Government Bond Index (EMGBI).
FTSE Russell, which is a leading global multi-asset index, analytics and data provider, announced this in its results of semi-annual country classification review for fixed income and equities.
If India becomes part of the EMGBI, foreign portfolio investors could step up investments in the Government Securities (G-Sec) market, say market players.
The possibility of inclusion in EMGBI is good news for the government as its borrowing programme for FY22 too is high at about ₹12.05-lakh crore (₹12.80-lakh crore in FY21). Auctions held since February have seen significant devolvement as investors are demanding higher interest rates on G-Secs. The Reserve Bank of India has had to devolve a significant portion of the auction of at least three G-Secs on primary dealers, indicating its discomfort with the yields at which the market participants wanted to buy these securities.
FPI investments coming into G-Secs can take the pressure off banks to invest in these bonds and allow them to focus on lending. According to the RBI’s latest monthly bulletin, FPIs owned only 2.10 per cent of the Central Government Dated Securities as at December-end.
‘A positive development’
Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “If we are included in EMGBI, it will be a positive development. So far, the funds the Central and State governments needed were being raised from domestic investors — banks, insurance companies, provident funds. Since our borrowing programme is increasing, we need new investors.”
Irani noted that the more global indices India is included in, the more will be the demand for G-Secs. So, if G-Sec yields go down because of this, corporates will also benefit.
According to FTSE Russell’s December-end fact-sheet, the FTSE EMGBI measures the performance of local currency government bonds from 16 countries, providing a broad benchmark for portfolio managers looking for a measure of sovereign emerging markets.
To enter the EMGBI, a market must satisfy the size and credit criteria. Accessibility of bonds and markets and replicability of returns are the other requirements. “Once a market has met all the requirements, an announcement will be made that this market is eligible for inclusion into the EMGBI. If it continues to meet all three requirements for three consecutive months after the announcement, the market will join the EMGBI at the end of the three months that follow,” said FTSE Russell.
Entry criteria
For entry into the EMGBI, the outstanding amount of a market’s eligible issues must total at least $10 billion. An eligible market must also maintain a minimum market size of at least half of the entry-level market size criteria.
The market appeared to have shrugged off the news, with the 10-year benchmark yield ending two basis points higher at 6.14 per cent on Tuesday. BusinessLine spoke to a bond market expert, who said the market wasn't excited by the development nor can one expect FPIs to start pouring funds into Indian bonds following the news. Ananth Narayan, Professor of Finance at SPJIMR, said the entire process can take many months. “It took China years to get the process done. That is why you did not see any major knee-jerk reaction in the bond market. Also, from a macro perspective, there is a lot of concern around Indian debt,” he said.
(With inputs from Bhavik Nair in Chennai)