It has been much talked about in terms of whether India will be included or not but now brokerages are saying it is a matter of when and not if. How are you viewing this entire set up and how likely is it that Indian bonds will be added to the global indices in September itself?
I have a feeling that there is a very good chance of Indian bonds being included in the global indices very soon and what you had mentioned is very true because with Russia going out, there is space for another emerging market and India has been one of the better performing markets for the last decade and we have been very consistent when it comes to most of the economic indicators, especially our external sector.
That is one of the reasons why the global investors would like to have a greater share of the Indian growth story and that is why we see that there is a lot of interest on that side. There are, of course, certain issues on the taxation front in terms of capital gains. That was discussed before the Budget and there were expectations of that coming through, which would probably provide an additional incentive. But we have come a long way from that.
We will, of course, have to see what is the final position of the Government of India but from an investor perspective, it makes a lot of sense to get into a country like India. There are major gains to be made on account of a balance of payment because we could be expecting larger sums of money to come in which will actually shore up the capital account. Currently we know that CAD is going to be under pressure for the next couple of years because a growing economy will always have larger imports compared to exports and we are relying a lot on the capital account. As more funds come into India in the bond market, these would be passive funds.
Unlike equity, which could be very volatile, investments in debt tend to be a bit more long term focussed. There is lot of advantage for the Indian markets not just in terms of investors but also from the market perspective in terms of the funds which come in, the way in which the bond yields could generally move downward, something which even the RBI is working at to make sure that the cost of borrowing for the government remains a bit more acceptable.
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What does that do in terms of perception of investments in India. People are looking at India and Indian bonds much more than what they used to do earlier?
To begin with, while there are these estimates of $20-30 million coming in, what is more important is the perception and that is something which is going to drive investment in future and the moment we get included in these bond indices, automatically the signal is sent that India is a very important market and one needs to have a share of it. So either one invests into the index or invests in the bonds, the arbitrage between the index and actual investments in India. In India, as far as the FPIs are concerned, a lot of push has been given for them in the G-Sec market even in the corporate bond market of which, hopefully there will be positive spillover effects once we see a larger quantum of funds coming into the government securities market.
You mentioned some tax changes that the Street was expecting and that has not happened yet. The Finance Minister has said that global bond index inclusion will come to its natural conclusion soon. How important do you think is getting that clarity with respect to the tax adjustment? Do you think without it also there is a strong chance that India will be added to the global bond fund?
The government is always badgered for a level playing field between domestic and foreign investors but there are other issues in terms of clearance; whether it should be done in Europe or in India. The investors may not mind the clearance taking place in India and we also probably will accept the taxation issues because that is a fair thing to accept. But we need to have an easier process in terms of registration as well as settlement. That has to be sped up.
When the government is getting indication of reaching a logical conclusion, I have a feeling it cannot be about the tax issues right now but definitely in terms of convenience, the ease of doing business something which the government has been working relentlessly and that is something where we could see certain changes taking place so that foreign investors find it more convenient and have a seamless investment process.
Do you have any estimate of what kind of inflows could this bring in?
I would tend to go along with the Street where they are saying $20 to $30 billion but that may not come immediately. Let us assume that for ‘23-24, we have India included in the global bond index. We could be seeing funds coming in gradually but probably by ‘24-25 we could be looking at something around $30 billion which will be quite substantial because it is going to be debt, not in equity and it is going to be kind of a stable flow for as far as balance of payment is concerned.