India denied entry into JPMorgan’s influential bond index, misses out on $30 billion opportunity

India has been bidding for a place in global bond indexes for almost a decade now, and an entry into that space would mean an investment of $30 billion for Indian government bonds in 10 months. After years of trying to gain a foothold among global bonds, India had a shot at being included by JPMorgan as the last emerging market in its bond index. But the country’s hopes have been dashed as the key financial institution has cited investment hurdles as a reason to keep Indian government bonds out of its index.

Can use the time to strengthen infrastructure

India will have to wait another year, since investors are unsure about the capacity of its bond market to handle the massive inflow of capital which would follow its inclusion. The hopes were high for the inclusion of Indian government debt instruments by JPMorgan, since Rupee-denominated bonds were on positive-watch for a year. The assets also known as Masala bonds are issued by the Indian government and companies to investors abroad to raise funds in Indian currency.

Policy changes failed to woo FPIs

Reports suggest that hurdles for investment caused by India’s bond market infrastructure caused the rejection, while JPMorgan’s head of index research acknowledged that India had made significant efforts to ease the entry of foreign portfolio investors (FPIs). But with Rupee rates falling and high bond yields, FPIs have only used a quarter of their investment limit in the central government’s debt instruments. The RBI’s push to allow more access for foreign investors didn’t deliver results, since returns on bonds are down due to higher interest rates globally and inflation in India.

Need to scale up procedures

Doubts about the handling of settlements and clearing, which is still done manually in India, might be a major cause for apprehension among investors. Here, the time stamps for buy and sell orders need to be matched to the minute and the size of the order to two decimal places. Doing this manually leaves more space for discrepancies, which can lead to the cancellation of transactions.

The market was also expecting India to announce an exemption from the capital gains tax for FPIs this year so that settlements outside India can be done through a platform called Euroclear, but that policy change never came through. Once these issues are ironed out, India can look at cashing in on its position among emerging markets on the influential JPMorgan bond index.