India’s inclusion in JP Morgan Bond index is a welcome boost for the Centre

Foreign investors are eagerly buying Indian government bonds as JPMorgan Chase & Co.’s main emerging market debt index now also includes India.

The inclusion of India in the JPMorgan Bond index is a huge thumbs-up for the Union Governent in many aspects. It also opens up humongous opportunities for investment in the government bond market.

India’s $1.3 trillion sovereign debt market has become a magnet as global investors were seen eagerly buying bonds even before they were added to JPMorgan Chase & Cos main emerging market debt index that began on June 28.

While opportunities do abound aplenty, it's also prudent to look at the risk perceptions that any such market friendly moves could cop up. In order to do that let's look at what exactly is A FAR bond.

The Reserve Bank of India (RBI), in consultation with the Union Government, introduced a separate channel, called the 'Fully Accessible Route' (FAR), for non-resident investment in Government of India dated securities with effect from April 1, 2020.

From a work in progress, it is today a huge validation of the Indian financial system and the regulatory architecture now in place.

While generally returns are evaluated with intense focus and priority, planning to factor in downsides is an important rule of the thumb, which arevital for any investor.

Talking to Bizz Buzz, MV Hariharan, ex-treasury head of SBI, says, “Fixed-rate government bonds can have interest rate risk, which occurs when interest rates are rising and investors are holding lower paying fixed-rate bonds as compared to the market. Also, only select bonds keep up with inflation, which is a measure of price increases throughout the economy.”

So while the expected billions are likely to unfold into the market in a phased manner, a calibrated and cautious approach will spell the difference between euphoria and crushing disappointment, he said.

Foreign investors are eagerly buying Indian government bonds as JPMorgan Chase & Co.’s main emerging market debt index now also includes India.

Venkatakrishnan Srinivasan, managing partner, RockfortFincap, says, “India, wary of sudden foreign currency inflows, has steadfastly refrained from offering any special tax concessions. Despite significant pressure to provide tax benefits, the Indian government has consistently declined to do so.”

Nonetheless, both JP Morgan and Bloomberg have included India in their respective bond indexes without any tax advantages. To encourage foreign investment in Indian bonds, the Centre has brought in myriad amendments to simplify the documentation and settlement processes for investors, he said.