Adding Government Bonds To JP Morgan Global Index Can Pull $200 Billion Inflows: Report
According to the report, despite being a major emerging market, India remains the most under-owned market by foreign investors.
The inclusion of government bonds in the JP Morgan global bond index can potentially help attract $150–200 billion of foreign fund inflows in the medium term, says a Wall Street brokerage.
According to a Bank of America Securities report, at around 1%, India has the lowest foreign ownership of government bonds among its emerging market peers.
The much-delayed inclusion in the JP Morgan government bond index can lead to better fund inflows, which in turn can release a lot of money from the banks' mandatory Statutory Liquidity Ratio holdings, it added.
According to the report, despite being a major emerging market, India remains the most under-owned market by foreign investors.
Following the example of other emerging markets, it said opening up local bond markets further to foreign investors can potentially see $150–200 billion in inflows over the medium term if it draws more active flows over time and other indices follow suit.
The brokerage said it expects the inclusion to happen sooner rather than later.
JP Morgan will be reviewing the index next month, raising expectations of India's inclusion in the global indices, the report said, noting that the lack of comments from the government indicates little need or political will to make additional concessions this year.
Foreign investors have been increasing their interest in India for many months now, and the need for further diversification of index constituents may lead the index providers to go ahead with inclusion despite frequently cited operational difficulties for smaller investors.
The optimism of the brokerage firm comes from the increase in the securities under the Fully Accessible Route to more than $380 billion, which is enough to get a final weight of 10%.
Thus, the direct passive flows may total $24 billion based on indexed Assets Under Management of around $240 billion.
The increased fund inflows can increase the government's ability to maintain a slow pace of fiscal consolidation over the next few years without worrying about higher borrowing costs.
If the government sticks to the medium-term fiscal framework, then supply-demand balance for bonds can improve materially and banks' would be able to free up balance sheet for lending to the private sector, the report said.
