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Morgan Stanley on Thursday said that India is likely to be included in global bond indices by the first quarter of 2022. According to the banking company, the move could attract USD 170 billion to USD 250 billion in bond inflows in the next decade in the base/bull scenario. The firm added that the move could have positive implications for the economy, forex, bond yields and equity markets. Morgan Stanley made the comments in a research report titled 'EM Strategy -- The Transformation of India's Bond Flows'.
“Foreign ownership of Indian government bonds (IGBs) has been declining, but 2022 would be the turning point that could bring an acceleration of bond inflows,” Morgan Stanley said in its note. India has been keen to be included in global bond indices since 2019. The attitude change in the country has been visible in its moves as rising government borrowing, and a desire to push investment rates higher placed the need to open up the domestic bond market. The country now needs a more extensive investor base.
According to the Morgan Stanley, the GBI-EM and Global Aggregate indices are likely to include India by next year. "We expect one-off index inflows of USD 40 billion in 2022-23 followed by annual inflows of USD 18.5 billion in the next decade, pushing foreign ownership up to 9 per cent by 2031," the firm said. The banking firm further added that foreign inflows could flatten the IGBs curve by 50 basis points. “A historically steep curve suggests enough risk premium being in the price and foreign demand could drive the curve flatter,” it said.
Based on the current settings, a structural surplus in the balance of payments and improving productivity could mean that the Indian rupee appreciates by 2 per cent per year in real effective exchange rate (REER) terms. The firm recommended the long 10-year IGBs, targeting 5.85 per cent for the country.
The increased inflows would directly help reduce India’s borrowing cost and improve its debt sustainability. This will go on to helping the country regain its investment-grade rating. More robust growth and lower borrowing costs will help banks grow, and large private banks will be the biggest beneficiaries. HDFC, Bajaj Finance, Mahindra Finance and Cholamandalam Finance could be the potential beneficiaries among non-bank financials.