InvestorQ : Why has it taken so long for Indian bonds to be added to debt indices? Does India have any risk from being added to these indices?
indhumathi Sayani made post

Why has it taken so long for Indian bonds to be added to debt indices? Does India have any risk from being added to these indices?

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4 months ago
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There are two parts to your question. Let me first address why index inclusion has taken so long on debt indices. This is despite the fact that Indian equities had been present in these global indices for a very long time? One reason why the index service provides have been wary is regarding tax aspects. This is more so after the government had introduced retrospective taxation in 2012 and cases like Cairn and Vodafone are still pending.

Another constraint that index service providers see is the depth and breadth of the debt markets in India. In fact, JP Morgan has expressed exactly the apprehension that the G-Sec markets in India were still dominated by the banks and other large financial institutions. There is also an issue of currency stability and the lack of free convertibility makes to tough to judge if the currency is properly valued. All these are roadblocks to debt index inclusion.

Let me come to the second part of your question on the likely risks of being included in the debt market indices. One risk of inclusion in debt indices is that it would make Indian debt paper vulnerable to shifts in global yields. If inflation in India goes up and real yields fall compared to say the US markets, then FPIs could prefer other markets. In the case of passive funds, the outflows tend to be bunched like we occasionally see selling in equities.

A sharp debt outflows would also negatively impact the INR, as we saw in 2013. It is just that the impact could be magnified with index investing in debt. More importantly, an assumption is also that Indian monetary policy will have to be in sync with global monetary policies to avoid the risk of bunched outflows. Despite all these downside risks, inclusion in debt indices is a good start for India to globalize the Indian debt markets.

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