India Opens Access to Benchmark Sovereign Bonds in Index Bid
The portrait of Mahatma Gandhi is displayed on an Indian 50 rupee, left, and 2000 rupee banknotes in an arranged photograph. (Photographer: Brent Lewin/Bloomberg)

India Opens Access to Benchmark Sovereign Bonds in Index Bid

(Bloomberg) -- India opened up a wide swath of its sovereign bond market to overseas investors, taking its biggest step yet to secure access to global indexes as the government embarks on a record borrowing plan. Bonds rallied.

Global funds will be able to buy new five-, 10- and 30-year bonds from April 1, the Reserve Bank of India said in a statement late Monday. It scrapped caps on some issued debt including the benchmark and said tenors may be changed or added.

The rule change comes as Prime Minister Narendra Modi faces his biggest challenge yet after locking down the country for three weeks to contain a worsening coronavirus outbreak. Already under pressure from a slowing economy, Modi’s government needs inflows to fund a $22.6 billion stimulus package.

“It’s certainly a right step moving forward to further open up the local market,” said Arthur Lau, head of Asia excluding Japan fixed income at PineBridge Investments Asia Ltd. “Whether the breadth of the move is sufficient will depend on the frequency and magnitude of the issuance.”

Foreigners hold just 2.6% of the 60 trillion rupees ($794 billion) of sovereign bonds issued by India, and the government had set a 6% limit on overseas ownership. They also own under 2% of the outstanding benchmark 10-year debt.

India Opens Access to Benchmark Sovereign Bonds in Index Bid

Gains were seen in the securities selected by the central bank for full foreign investments. The benchmark 6.45% bond due in 2029 fell eight basis points to 6.13%, while the 7.32% note due in 2024 was down eight basis points at 5.59%.

The greater access comes just as global funds are selling emerging-market assets to hoard dollars amid fears of a global recession. They’ve sold $9.1 billion of rupee-denominated debt this quarter, the most in Asia, and the outflows helped send the currency to a record low.

“It makes sense at a time when the government is trying to fund fiscal spending,” said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. “Current offshore-onshore rate differentials don’t suggest there is a lot of pent-up demand.”

Five existing bonds immediately eligible for FAR purchase April 1:
  • 6.18% GS 2024 (currently 0.63% of outstanding is held by foreigners)
  • 7.32% GS 2024 (5.53%)
  • 6.45% GS 2029 (1.54%)
  • 7.26% GS 2029 (7.20%)
  • 7.72% GS 2049 (0.06%)

Inclusion in the Bloomberg Barclays Global Aggregate Index may translate into potential inflows of $6-$7 billion, according to HSBC Holdings Plc. A place in the JP Morgan GBI EM Index at a later date can potentially attract $12-$16 billion, the report said.

Under existing rules, foreigners can account for a maximum 30% of the outstanding amount of any sovereign security, and the combined upper limit will remain at 3.6 trillion rupees until new limits are given, the RBI said. It didn’t specify whether the bonds falling under the new rules will still be part of the overall cap.

The overseas cap in corporate debt will now be 15% of what’s outstanding, the RBI said. The plan to provide wider access to Indian bonds was first announced in the budget unveiled on Feb. 1.

Opening up the debt market along with allowing domestic banks to trade in offshore currency markets will help deepen the hedging market for foreign investors, according to Standard Chartered Plc.

Huge Borrowings

India will detail on Tuesday its borrowing plan for the first half of the fiscal year starting April 1. The government may slash or even cancel debt sales because of the virus outbreak, Reuters reported on Monday, citing finance ministry officials it didn’t identify. Authorities are also looking at selling these bonds to the RBI or to the state-owned Life Insurance Corp. of India, according to the report.

“Lower oil prices should be positive to India’s economy and this should help RBI and the government to have more room to support,” PineBridge’s Lau said. “That being said, the ongoing public health issue remains the major risk factor of how things will evolve especially after the lockdown.”

The yields on the benchmark 10-year bond fell to 5.98%, the lowest in more than a decade, on Friday after the RBI slashed the key rate by 75 basis points. It has since risen more than 20 basis points through Monday on concerns over new borrowings.

The idea of tapping the global debt market more aggressively was floated September when Modi was in New York. Bloomberg LP, the parent company of Bloomberg News and Bloomberg Barclays Indices, announced it would help Indian authorities navigate a course to inclusion in international bond benchmarks.

Investors who don’t have direct access to Indian debt can come via the International Central Securities Depositories, the central bank said.

“This is potentially the first milestone in the path toward global bond index inclusion,” said Mayank Prakash, fixed income fund manager at BNP Paribas Asset Management India. “Euro clearing shall be the next probable task.”

©2020 Bloomberg L.P.

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