FTSE puts India, Saudi on watchlist for inclusion in its bond index

FTSE Russell's semi-annual country classification review said market accessibility level of Indian and Saudi bonds will be considered for reclassification to 1 from 0

India’s efforts to include its bonds in global bond indices could fructify soon with FTSE Russell placing Indian and Saudi Arabian government bond markets on the watchlist for possible inclusion in its FTSE Emerging Government Bond Index.

FTSE Russell’s semi-annual country classification review released on Monday said the market accessibility level of Indian and Saudi Arabian bonds will be considered for reclassification to 1 from 0.

Global index users have shown interest in Indian government securities issued through the Fully Accessibility Route (FAR), FTSE said, adding that it will start a version of its FTSE Indian Government Bond Index that tracks these securities in coming weeks.

The government and the Reserve Bank of India (RBI) has included a number of bonds that would qualify for the FAR route where foreign investors can invest without any limit. The government first notified this in the Budget for FY20-21, and the central bank subsequently in April notified five securities to be eligible for the list. Together, they had an outstanding of Rs 4.2 trillion. Since then, “all new issuances of government securities of 5-year, 10-year, and 30-year tenors from the financial year 2020-21” were eligible as “specified securities” where foreign investors can take full exposure without any limit, along with resident individuals.

Technically, these securities are over and above the FPI investment limit in the domestic market. The RBI in April raised the FPI limits for corporate bonds to 15 per cent, from 9 per cent, for 2020-21. However, the overall FPI limit in government securities remained unchanged at 6 per cent.

If the bonds get included in the global bond index, foreign investors could pour in huge amounts of money in the Indian markets considering the high yields on offer, with relatively stable political stability and a strong repayment track record.

"This is a very welcome first step. If the bonds are included in the FTSE index, other well-known indices will be inclined to include India and this would attract healthy FII participation in Indian bonds," said Jayesh Mehta, Head of Treasury at Bank of America, India.

When a sovereign bond is included in a global index, the inflow in that country increases manifold. It could mean opening up avenues for at least $50 billion of fresh investment in the country, as some fund houses are not allowed to invest in any bonds that are not included in bond indices. Those funds can be readily tapped if the bonds are included.  

The Indian government is closely engaged with JP Morgan and Bloomberg-Barclays for inclusion of Indian bonds, but the indices need a minimum guaranteed investment limit of 15-20 per cent of the outstanding stock for foreign investors, which is not the case now. However, with new bonds getting included in the specified securities list, the inclusion could be just a matter of time, experts say.

“We look forward to continued engagement with the Reserve Bank of India to further understand the enhancement program that is currently being undertaken to improve the accessibility of the local market structure for global investors," FTSE said.

The index provider said it has been in talks with index users and regulators in Saudi Arabia to understand the market structure and investors’ experience. It will continue this interaction before its next country classification review in September 2021, it said.