India’s bond market will catalyse the rise of national economy

In his annual address at the 2024 edition of the World Economic Forum under the aegis of India Investment Summit, Reserve Bank of India (RBI) Governor Shaktikanta Das, on January 17, cautioned against the excessive reliance on a single currency, emphasising a risk mitigation strategy in transiting towards multicurrency dominance of which the ‘Global Rupee’ could exert its influence supported by large-scale settlement of international trade in the Indian Rupee (INR).

The INR gained momentum in recent times with the United Arab Emirates (UAE) receiving its first-ever payment in rupees for crude oil supplied to India. Even as challenges abound towards the INR’s internationalisation efforts, India’s emergence as an alternative to China — under the ‘China Plus One’ strategy — has attracted sufficient attention from foreign portfolio investors (FPIs) into Indian equities. While there is palpable enthusiasm among market participants, the picture remains incomplete without foreign participation in the Indian bond market. This bears significance as globally the volume and value of trade in bonds is at least three-times equities besides being a chieftain characteristic of the developed markets.

Enter the fully accessible route (FAR) — a liberalised mechanism aimed at encouraging qualified FPIs to invest in the lucrative India government bond (G-Bond) market. The party may have well begun with the inclusion of India G-bonds in the JP Morgan Emerging Bonds Index, projected to generate an inflow of Rs 2,49,306 crore ($30 billion) annually even as it becomes operational in June. In another positive, yet surprising, development, Bloomberg is actively considering the inclusion of India G-bonds in the Bloomberg Bond Index with a potential to generate $2-3 billion annually. Globalisation of Indian bonds has several implications both in the short-term and the long-term.

Echoing the point made by Das, India’s ambition to globalise the INR hinges on the trio of stability, quantity, and quality of foreign inflows. To that extent, active exposure to Indian bonds by foreign investors bodes well in keeping the currency volatility under check. India has the vantage of offering an attractive yield on the back of inflationary stability, macro-economic prudence, and consistency in policy — deriving benefits from an independent monetary institution overseen by a democratically-elected government.

The government on its part would be well served in utilising the foreign inflows to further expand the scale and scope of public investments at much greater momentum with measurable multiplier effects spilling over on the wider economy. Infrastructure, education, and health are some of the most sensitive public goods that can benefit from foreign flows.

A well-developed capital market is evident in equal development of both equity and debt markets. In the Indian scenario, while the former is relatively well developed, the latter is predominantly supported by sovereign issuances supported by public sector undertakings (PSUs). The inclusion of India G-bonds in world-leading bond indices provides sufficient impetus to rejuvenate the moribund private-sector bond market.

By relying excessively on select lenders for meeting capital expenditures, corporations inevitably pose systemic risks in the event of adverse economic shocks raising fears of delinquency. By tapping into the bond markets, corporations could manage their risk more efficiently by spreading the maturity to match the project’s risk profile leading to market-driven price discovery at competitive yields.

An attractive level playing field supported by a reformist agenda and monitoring can attract seasoned institutional and retail investors to revitalise the bond market by actively dissipating the lurching liquidity woes, which has traditionally posed a constraint preventing participation from the private sector. It is unsurprising in the current context that the private-sector bond market is dominated by PSUs lending a pliant role of quasi-supplier of liquidity to the government.

In the past, the government was unsuccessful in popularising the India Inflation Bonds (IIB) primarily aimed at capturing investment from inflation-sensitive consumers who are otherwise swayed by the lure of yellow metal serving little purpose in directing investments to productive sectors beside spiralling the current account deficit (CAD).

The G-bond momentum should awaken the dormant spirits of the policymakers to infuse a new lease of life to make the IIB popular, supported by active trading opportunities. Even if the government is successful in diverting a smaller percentage of investments away from gold into the IIB, it would have created an excellent precedence for future investors to vie the IIB as a robust alternative to gold.

As foreign investors start flocking into the India G-bonds, the government has a cardinal duty to maintain an investor-friendly posture as these investments should percolate into long-term investments to create a meaningful impact on society at large. Masala bonds may not have yielded an international flavour, but the Indian economy is becoming a delicacy for foreign investors to relish.

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.

(Ullas Rao is an Assistant Professor of Finance, EBS Dubai. X: @Ullasrao7. Sunita Mathur is Program Director & Assistant Professor of Accounting & Finance, Heriot-Watt University, Dubai.)