Global Investors Sour on Indian Bonds as Index Inclusion Stalls

Asset managers expect Indian bonds to fall after changes needed for sovereign debt to be listed on Euroclear weren't addressed.

Global Investors Sour on Indian Bonds as Index Inclusion Stalls
A man holds a two thousand Indian rupee banknote for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg).

Foreign money managers are turning bearish on Indian debt after policy makers skipped opportunities to implement reforms needed to enter global bond indexes.

PineBridge Investments Europe Ltd. and Lombard Odier now expect Indian bonds to decline after this month’s budget didn’t address tax changes needed for sovereign debt to be listed on the Euroclear platform. That was seen as an important step in improving foreign investor access by index providers, including JPMorgan Chase & Co., who are considering adding the securities to their benchmarks. 

Instead, investors were told the government and Reserve Bank of India are taking a “very calibrated approach” on the issue, with Governor Shaktikanta Das underlining the risk of outflows as well as inflows on index inclusion. Alongside record borrowings -- and a global surge in yields -- the lack of action has soured sentiment toward the nation’s bonds. 

“As a foreign participant in India’s local bond market, Euroclearability is important in order to ensure best execution for our clients and is a vital component for inclusion to the JPMorgan bond index,” said Anders Faergemann, senior portfolio manager at PineBridge Investments in London. “The outlook for Indian government bonds has turned bearish amid elevated price pressures and a heavy supply calendar.”

Global Investors Sour on Indian Bonds as Index Inclusion Stalls

Overseas investors withdrew about 14 billion rupees ($190 million) from government bonds through the so-called Fully Accessible Route, or bonds with no restrictions for foreigners since Jan. 31, a day before the budget disappointment. They had poured in about 10 billion rupees in the previous week.

India’s 10-year bond yield rose to 6.95% earlier this month, the highest in nearly three years, after the government shocked the markets with its record borrowings. Yields eased later after the RBI surprised with extremely dovish policy. The yield fell four points this week to close at 6.66% after the central bank announced few auction cancellations. 

The potential index inclusion was expected to bring in as much as $40 billion of inflows and help mop up a record debt supply of 15 trillion rupees. 

Less Attractive

The index inclusion seems to have hit a roadblock for now with the authorities refraining from abolishing the capital gains tax on Euroclear transactions. That is one of the key requirements of index providers such as JPMorgan.

That’s a step the nation isn’t willing to take, Revenue Secretary Tarun Bajaj said at a briefing earlier this month. Finance Minister Nirmala Sitharaman Thursday said India will tackle issues related to global bond index inclusion. Authorities have been slow on bond-market reforms amid concern of volatility in local markets. 

“The impetus to add now to Indian bonds is lower,” said Nivedita Sunil, fund manager at Lombard Odier. “If you are thinking about the overall macro situation from a relative value perspective it becomes less attractive.”

Uncertain Timing

The impasse has generated considerable uncertainty around when Indian bonds might be added to global indexes. JPMorgan didn’t reply to a request for comment, while FTSE Russell declined.  

Bloomberg LP is the parent company of Bloomberg Index Services Limited (BISL), which administers indexes that compete with those from other providers.

Still, not all are pessimistic about the delay in index inclusion. UTI Asset Management Company Ltd. expects the situation may change quickly in the event of progress. 

“There are indications that it is not off the table,” said Amandeep Chopra, group president and head of fixed income at UTI AMC in Mumbai. “We have not factored in an inclusion in the near term and any progress on this will be positive, and may warrant a relook at our positions.”

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