'India entry in global bond indices may lead to $40 bn inflows'
New Delhi: India may attract foreign inflows of USD 20-40 billion over a year if the country is included in leading government bond indices, says a report by Standard Chartered.
FII investment cap excludes India from popular indices.
Global asset managers, pension funds, mutual funds, and central banks use bond indices while making asset allocation.
According to the research note by Standard Chartered, India's inclusion in popular government bond indices could be positive for the country and negative for the government bonds of Turkey, Indonesia, Thailand and Hungary.
Currently, the aggregate foreign investment in government bonds is capped at USD 30 billion.
"If India were included in J P Morgan's Government Bond-Emerging Markets-Global Diversified (GBI-EMGD) index, this would be a substantial positive for INR and GolSecs," Standard Chartered said, adding that this would attract USD 20-40 billion of foreign inflows for India over a year.
"Government bond indices provide a benchmark for assessing and tracking the performance of government bonds as an asset class. The larger the assets under management (AUM) tracking the index, the better investor demand is for the index's constituent bonds," the report said.
The report further noted that "controls on FII investment in GoISecs prevent India's inclusion in more popular indices, particularly the GBI-EMGD index."
According to the Standard Chartered report, though India's policy makers appear to believe that high foreign ownership would lead to elevated bond-market volatility, a comparison of foreign holdings and bond-market volatility across 14 emerging markets showed only a weak relationship between the two factors.
"We find that for Asian markets, bond-market volatility is sensitive to the economy's external vulnerabilities. We think the government's progress in reducing India's external vulnerabilities will be important as it liberalises foreign ownership," the report said.