India could be included in two major global bond indexes from the end of 2022, bringing one-off flows of $35-40 billion, Goldman Sachs said, according to Reuters. India’s inclusion in the JPMorgan GBI-EM Global Diversified Index was more likely by the end of 2022 or early 2023, the bank said in a research note. Inclusion in the Bloomberg Global Aggregate indices would likely happen at the end of 2022 or even end of 2023, the bank said. Goldman Sachs estimates passive inflows of around $35-40 billion if India joined both indexes.
Earlier this month, another global financial services major Morgan Stanley said that it expects India to be included in global bond indices in early 2022 and the index inclusion will attract $170 billion to $250 billion in bond inflows in the next decade in base/bull scenario.
This will have profound implications for the economy, forex, bond yields and equity markets, it said in a research report titled ‘EM Strategy — The Transformation of India’s Bond Flows’.
Morgan Stanley said foreign ownership of Indian government bonds (IGBs) has been declining but 2022 will be the turning point that could bring an acceleration of bond inflows.
The GBI-EM and Global Aggregate indices are likely to include India in early 2022. “We expect one-off index inflows of $40 billion in 2022-23 followed by annual inflows of $18.5 billion in the next decade, pushing foreign ownership up to 9 per cent by 2031.”
The opening up indicates policy-makers’ desire to push growth rates higher through investment, Morgan Stanley said, adding “it will push India’s balance of payments into a structural surplus zone, indirectly create an environment for a lower cost of capital and ultimately be positive for growth.”
Morgan Stanley said foreign inflows could flatten the IGBs curve by 50 basis points. A structural surplus in the balance of payments and improving productivity could drive Indian rupee to appreciate by 2 per cent per year in real effective exchange rate (REER) terms. “We recommend long 10-year IGBs, targeting 5.85 per cent.”
Foreign inflows should lead to a lower borrowing cost, which helps debt sustainability as it is important for India to keep an investment grade rating.
“We see banks benefiting from stronger growth and lower borrowing costs.” Private banks particularly large ones should be key beneficiaries.
Among non-bank financials, potential beneficiaries are likely to be HDFC Ltd., Bajaj Finance, SBI Cards, Mahindra Finance and Cholamandalam Finance. (With Agency Inputs)
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