Inclusion in global index will mark turning point for India, Morgan Stanley says
India is expected to be added to global bond indices by the first quarter of 2022, which would attract $ 40 billion in inflows to the country’s debt market over the next two years, according to Morgan Stanley.
“Foreign ownership of Indian government bonds has declined, but 2022 would be the turning point that could lead to an acceleration in bond inflows,” Morgan Stanley strategists led by Min Dai wrote in a note. Inclusion in global bond indices is expected to bring in $ 18.5 billion in entries each year over the next decade, up from just $ 36.4 billion over the past ten years.
India is working to include its sovereign bonds in famous global bond indices to attract foreign inflows and reduce the chronic budget deficit, which widened to a record high in the fiscal year ended in March as the coronavirus was weighing on the economy.
The inclusion of global bonds “will push India’s balance of payments into an area of structural surplus, indirectly create an environment for a lower cost of capital and ultimately be positive for growth,” according to Morgan Stanley.
Potential flattening of the yield curve
A structural balance of payments surplus and improved productivity could lead to an appreciation of 2% per annum in the real effective exchange rate of the rupee. Foreign inflows could flatten India’s sovereign bond curve by 50 basis points, recommend opting for long 10-year bonds, targeting a yield level of 5.85 percent.
“A historically steep curve suggests that a sufficient risk premium is in the price and that foreign demand could flatten the curve,” he said.
The inflows would also lower India’s cost of borrowing and improve its debt sustainability, helping to maintain its premium credit rating. Banks will benefit from stronger growth and lower borrowing costs, and private banks, especially large ones, are expected to be the main beneficiaries. Among non-bank financial services, the potential beneficiaries are likely HDFC, Bajaj Finance, SBI Cards, Mahindra Finance, and Cholamandalam Finance.