News

Published: September 23, 2023
Updated: September 23, 2023

Unlocking India's Economic Potential through Bond Market Inclusion

Broadening Horizons with JP Morgan's Index

The inclusion of Indian government bonds in JP Morgan's emerging market debt index is poised to revolutionise India's financial landscape. Chief Economic Advisor V Anantha Nageswaran anticipates that this significant move will not only expand India's investor base but also potentially bolster the rupee, facilitating lending by Indian financial institutions. Moreover, it could streamline the financing of the current account deficit (CAD) while concurrently reducing government borrowing costs.

Balancing Act: Global Perceptions and Sensitivities

While embracing this transformational step, Nageswaran underscores the importance of aligning India's fiscal and monetary policies with global perceptions and sensitivities. The influx of foreign holdings, although beneficial, may introduce volatility into the Indian bond market and currency during periods of global uncertainty, irrespective of Indian macroeconomic fundamentals.

A Favourable Outlook

In his virtual press briefing, Nageswaran expresses a favourable outlook, asserting that the advantages of index inclusion far outweigh the potential drawbacks. He highlights that the Indian bond market is already robust, and the cost of capital is reasonable. In fact, there is a possibility that borrowing costs might further decline.

Maintaining Macroeconomic Stability

However, Nageswaran cautions that as foreign investors show increasing interest in India due to its stable macroeconomic policies, it is imperative to ensure that this influx does not compromise India's macroeconomic stability. He emphasizes the growing importance of macro-prudential policies in the future.

The Rupee's Dilemma: Opportunity and Challenge

Increased demand for government bonds in rupees could lead to a nominal appreciation of the currency. While this presents both an opportunity and a challenge, Nageswaran stresses the need to maintain the rupee's competitiveness.

Global Volatility Impact

Nageswaran acknowledges that India's government securities (G-sec) yields and currency are bound to be affected by external events causing financial market volatility worldwide. Investors will respond to global developments in their portfolios, adjusting their exposure to the Indian market accordingly.

Rectifying Anomaly: Low Foreign Ownership

India's government bond market ranks third among emerging economies, yet foreign ownership stands at less than 2 percent, one of the lowest compared to other emerging markets. Nageswaran emphasizes that this inclusion in global bond indices will rectify this anomaly.

India's Resilience to Volatility

Addressing concerns about volatility, Nageswaran highlights India's ability to handle such challenges. He cites the experience and expertise of the central bank in managing currency and interest-rate volatility.

The inclusion of Indian government bonds in JP Morgan's index marks a watershed moment for India's financial sector. It promises to broaden horizons, reduce borrowing costs, and potentially strengthen the rupee. However, maintaining macroeconomic stability and competitiveness remain paramount in this transformative journey. As India embraces this change, it must continue to navigate global economic fluctuations with resilience and prudence.