Global Bond Indices

Why in news?

The Indian government has been trying hard to include the government debt in the large global bond indices.

What are global bond indices?

• Global bond indices include the emerging debt markets that closely monitor local currency bonds that are issued by governments of various developing nations.
• JP Morgan and Bloomberg–Barclay’s are the popular global bond market indices.
• Significance- Global bond indices help investors track the movement in bonds in multiple jurisdictions and aid in relative comparisons.
• Indices are benchmark or guides to investments by mutual funds, pension funds and other large investors that typically prefer to hold onto investments for longer periods.
• In the bond market, there are indices that track high-yield risky bonds, emerging market bonds and government bonds.

What basic criteria is required for index inclusion?

• Conditions that enable easy flow of money into the country is predominant.
• The countries must meet parameters on liquidity, safety, and returns.
• The main parameters include
  • The size of the market
  • The country rating
  • Ease of access
• Country-level criteria for index inclusion includes
  • Absence of restrictive laws on movement of capital
  • Availability of forex
  • Adequate hedging mechanism
  • Tax laws
  • Settlement of trade

What about India’s case?

• Despite being the second largest bond market within emerging markets, India is not a part of the global index.

Reasons for non-inclusion

• Taxation laws- At present, long-term capital gains is taxed at 20% (excluding surcharge), while short-term capital gains is subject to 15%.
• India is unwilling to discriminate between domestic and foreign investors and place foreign investors advantageously.
• Settlement mechanism- At present, all bonds, whether G-secs or otherwise, if listed as part of the index, are to be settled in Euroclear.
• But, India is batting for local settlement of its government securities, as in the case of China.
• Even if settlement is allowed in domestic clearing houses, the process is cumbersome for foreign investors.

Euroclear Bank is a provider of settlement services for cross-border transactions, whether bonds (domestic or international), equities, derivatives or investment funds.

What are the benefits of being included in global bond indices?

• Reduced pressure on commercial banks- The inclusion in the global bond index will reduce the pressure felt by commercial banks to absorb the majority of government bonds.
• Strengthen the investor base- Inclusion in global indices would strengthen a key investor base -foreign institutional investors.
• Surge in investment- If India is included in the global bond index, it will attract passive inflows, which in turn will result in the surge of active foreign fund inflows.
• Confidence in Indian rupee- It will benefit the Indian rupee as there will be increased confidence, resulting in further strength and stability.
• Equity inflows- With a stronger rupee, equity inflows are also likely to rise.
• Stable exchange rate- A steady flow of dollars keeps the exchange rate from depreciating too much.

A report by JP Morgan estimates that India’s inclusion in the global index will increase the foreign ownership in G-Secs to 10% from the current level of less than 2%.

References

1. https://www.thehindubusinessline.com/blexplainer/bl-explainer-the-big-deal-about-global-bonds-and-indias-inclusion/article65965559.ece
2. https://www.moneycontrol.com/news/business/markets/mc-explains-why-india-should-pursue-inclusion-in-global-bond-indices-9100201.html
3. https://www.fisdom.com/global-bonds-index-why-indias-inclusion-matters/

Quick facts

Passive fund

• A passive fund is an investment vehicle that tracks a market index, or a specific market segment, to determine what to invest in.
• Example- Tracker funds, such as ETFs (exchange traded funds) and index funds.