• UGI USER
  • Jul 01, 2024
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A NEW ERA FOR INDIA’S BOND MARKET

Syllabus:

  • GS-3- GDP growth rate , economic and overall development , Monetary policy and Credit growth , Bond market

Focus:

  • This article explores the implications of the inclusion of Indian government bonds in the JP Morgan Bond Index. It discusses the potential benefits, including increased foreign investment, enhanced market liquidity, and lower yields. It also highlights the associated challenges, such as currency volatility and the need for careful monitoring by the Reserve Bank of India (RBI).
Source - ET

Introduction

  • Inclusion Announcement: The inclusion of Indian bonds in the JP Morgan Bond Index was announced in September, leading to a build-up of holdings in government securities (G-Secs) by foreign portfolio investors (FPIs).
  • FPI Holdings Growth: The assets under custody of sovereign bonds held by FPIs climbed from around $19 billion in September-end to $28 billion by mid-June, indicating pre-positioning to benefit from the index inclusion.

Immediate Market Impacts

Increased Foreign Investment

  • Passive Investment: The JP Morgan index will assign a 10% weight to Indian government bonds at a rate of 1% per month. This ensures some level of passive investment in Indian bonds.
  • Qualifying Securities: Twenty-three securities qualify for investment based on norms for residual maturity and amount outstanding, necessary for rebalancing the index.
  • Potential Inflows: Estimates suggest inflows of $20-25 billion, translating to around 1.8-2 trillion INR of potential purchases.

Easing Liquidity

  • Reduced Pressure on Banks: The new player in the market eases liquidity, reducing the pressure on banks to subscribe to these securities. This allows banks to focus more on lending.
  • Secondary Market Activity: There will be secondary market purchases of existing securities, freeing up funding space for new securities issued this year.

Impact on Bond Prices and Yields

  • Higher Demand, Higher Prices: Increased demand for government paper will push prices up due to limited supply, leading to lower yields.
  • Mark-to-Market Gains: Banks holding onto these securities can expect mark-to-market gains from the rising prices.
  • Broader Yield Impact: Lower yields on G-Secs without any rate action from the RBI will likely lead to a general decline in commercial and corporate bond rates.

Forex Market Dynamics

  • Stronger Rupee: An influx of $20-25 billion annually will bolster the forex market, increasing the supply of dollars and strengthening the rupee.
  • RBI’s Role: The RBI may need to intervene to manage currency appreciation to prevent loss of export competitiveness.
About SEBI :

  • Establishment: SEBI was established on April 12, 1988, and was given statutory powers on January 30, 1992, through the SEBI Act, 1992.
  • Objective: The primary objective of SEBI is to protect the interests of investors in securities, promote the development of the securities market, and regulate it.
  • Headquarters: SEBI’s headquarters is located in Mumbai, Maharashtra. It also has regional offices in New Delhi, Kolkata, Chennai, and Ahmedabad.
  • Structure: SEBI is managed by a Board consisting of a Chairman, two members from the Ministry of Finance, one member from the Reserve Bank of India (RBI), and five other members appointed by the Government of India.
  • Functions: SEBI performs three main functions: quasi-legislative (framing regulations), quasi-judicial (passing rulings and orders), and quasi-executive (conducting investigations and enforcement actions).
  • Regulatory Authority: SEBI regulates stock exchanges, mutual funds, depositories, and other market intermediaries. It also oversees corporate governance norms and mandates disclosures by listed companies.
  • Investor Protection: SEBI ensures investor protection through various measures, including registering and regulating the functioning of stockbrokers, sub-brokers, share transfer agents, and other market intermediaries.

Broader Economic Implications

Collateral Impact on Equity Markets

  • Increased Attention: The inclusion might lead to closer monitoring of Indian markets by foreign investors, potentially affecting equity markets, even though bond and equity investors are different.
  • Bloomberg Index Inclusion: From January 2025, Indian bonds will also be included in Bloomberg indices, further enhancing the market’s profile.

Concerns for the RBI

  • Currency Volatility: Sudden large dollar inflows could cause currency appreciation beyond tolerable limits, necessitating RBI intervention.
  • Monetary Policy Challenges: Excessive funds can lead to volatility in the bond market, complicating monetary policy. The yield curve’s behavior may be affected by liquidity at shorter tenures and Fed actions at longer terms.
  • Concentration Effects: Inflows concentrated in specific securities may cause skewed demand, affecting market stability.

Long-Term Perspective

Global Gravitas and Closer Scrutiny

  • Enhanced Market Profile: Inclusion in global indices provides the international recognition that was missing in India’s largely domestic bond market.
  • Increased Scrutiny: Global participation will bring closer scrutiny, especially regarding fiscal management as deficits convert to G-Secs in the global market.

Conclusion

  • The inclusion of Indian government bonds in the JP Morgan Bond Index marks a significant milestone for India’s bond market.
  • It brings increased foreign investment, liquidity, and a potential decline in yields.
  • However, it also necessitates vigilant monitoring by the RBI to manage associated risks such as currency volatility and market stability.

Source:The Economic Times

Associated Article :

https://universalinstitutions.com/the-good-and-the-sobering/

Mains Practice Question :

GS-3

“Discuss the implications of the inclusion of Indian government bonds in the JP Morgan Bond Index. How will it affect foreign investment, market liquidity, and yields? What are the potential challenges the Reserve Bank of India might face in managing this inclusion?.”(250 words)