FOREIGN OWNERSHIP OF GOVERMENT BONDS

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 The Big Event, India's Bond Inclusion in Global Bond Indices, is eminent now. How is this important? Let's talk about this.



✍️Why India's Inclusion in Global Bond Index Matters?

🔸Even though India fully opened its equity market boundaries for FIIs in 1993 globalization.

🔸 India is the only major Emerging Market (EM) whose government securities are not in the global Bond Indices.

🔸India has held back till now in openings its bond market for FIIs due to a major concern related to the impact of Hot money inflows & outflows on the currency market.

✍️But Many Steps have been taken in that direction over the years.

🔸Different Foreign Investors Categories have been merged in foreign portfolio Investors (FPIs)

🔸Revision has been done on quantitative restrictions i.e., how much Indian G-Sec Bonds foreign investors can buy

🔸Either Limits have been raised or waived through the Voluntary retention route (VRR), Fully accessible route (FAR).

🔸FAR, a Separate Bond Category was created so that Foreigners can buy Bonds without any limit from this bucket of Bonds.

Why Now? 🤔

🔸India has been on the watchlist of Index managers J.P MORGAN & FTSE RUSSELL, An LSEG Business.

🔸In March 2022, Russia which constitutes 8%-10% of Bond Indices, was excluded from the Index.

🔸Russia's exclusion has created an imbalance in indexes. As a result, Investors are demanding to include India in bond indices.

🔸AT the same time, Index managers have been focusing on widening the investable Emerging Markets (EMs) universe.

🔸One of the most prominent reasons is that Indian G-Sec Bonds Deliver >6% return annually, which is more than most developed & emerging economies.

🔸Investment hurdles include a lengthy investor registration process, and operational readiness required for trading, settlement & custody of assets onshore.

✍️Let's have a look at India's G-Securities Market

🔸Total Size ₹86 Lakh Crore
🔸Out of Total FPIs ownership of G-Sec worth ₹1.41 Lakh Crore (1.6% of total), FPIs own-
🔸FAR bonds worth ₹59000 Crore
🔸Non-FAR Bonds worth ₹82000 Crore

✍️Expectations After Inclusion

🔸 One-time Inflow of $30-$40 billion.
🔸After this $18.5 Billion every year will push foreign ownership up to 9% by 2031.

✍️Foreign ownership of Government Bond

🔸India 1.60%
🔸Turkey 8.70%
🔸China 10.60%
🔸Indonesia 22.60%
🔸Mexico 41.30%
🔸Brazil 44.40%

✍️Implications of Indian Bond Inclusion

🔸High demand will bring down the Bond Yield
🔸Low Bond Yield will decrease the cost of capital
🔸Lower cost of capital will boost (positive) equities
🔸Rupee will appreciate due to the demand for Indian Bonds

China was put on a watchlist in Jun'17 & announcement for inclusion came on Sep'19 it was included on Feb 20 whereas India has been on the watchlist since Jun'20.

But the appeal of Indian Rupee Bonds has reduced as the interest rate differential between US treasuries & Indian bonds is at a 12-year low.


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