by Manesh Gupta, senior research analyst, fixed income
Despite the tragic impact of COVID-19 on India in recent months, the country remains a potential target of global investors with long-term horizons.
Indian financial markets have witnessed far reaching reforms in the post liberalisation era in terms of market design including introduction of new instrument and derivative products, regulatory reforms and technological developments. The Indian debt market far exceeds its equity equivalent, and is estimated to be around USD 1.7 trillion, of which approximately USD 1.1 trillion are in central government securities also known as G-Secs or Gilts.
FAR (Fully Accessible Route) Bonds
India government has been taking several measures to encourage participation by foreign investors into the Indian debt market. Foreign investors have historically only been permitted to invest in the Indian government securities up to a 6% limit of the total amount outstanding.
In 2020, government of India announced that certain categories of G-Secs will be opened fully for the foreign investors, without restrictions.
Following the announcement, the route came into effect from April 1, 2020 and the Reserve Bank of India (RBI), India’s central bank and the manager of government debt, notified that all new issuances of 5, 10 and 30 years will be eligible for this route.
As of May 31, 2021 there were 13 bonds eligible under this route, with a total amount outstanding of about USD 174.71 billion.
The track record of India FAR bonds
Following the narrative of “hunt for yield” in the current low interest rate environment, India, an investment grade country, has recently offered higher yield and higher risk-adjusted returns relative to the broader EM and Asian bond markets.
India also offers diversification through deep bond markets. The Indian government debt market is second largest among emerging markets in terms of value and number of outstanding issues after China. It is third largest in Asia after China and Malaysia in terms of percentage of GDP.
The FAR bonds alone would stand as the fourth largest among emerging markets in terms of market value.
It also has one of the more advanced technologies for trading and settlement. Market regulators have been keeping an eye on the capital markets and developing programmes to encourage investors. The steps taken have helped increase participation in the Indian markets, steering it to next level.
FTSE Indian Government Bond FAR Index
In April 2021, we launched the FTSE Indian Government Bond Index to track the performance and provide additional transparency for the bonds issued under the Fully Accessible Route programme.
The base date of the index is April 30, 2020 and the base value is 100.00. Since the inception, the index has returned 6.20% in local terms.
Below are some headline statistics comparing the FTSE Indian Government Bond FAR Index with EM and Asian Government Bond Indexes:
What else must India do to satisfy Global buy-in?
FTSE Russell announced in March 2021, as part of the Fixed Income Country Classification framework, India would be added to the Watch List for potential reclassification of market accessibility from “0” to “1”, and consideration for inclusion in the FTSE Emerging Markets Government Bond Index. As part of the Fixed Income Country Classification Process, we engage with the Reserve Bank of India to further understand the enhancement programme that is currently being undertaken to improve the accessibility of the local market structure for global investors.
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