Modi Woos Index Funds by Opening Bonds Wider to Foreigners
A trader talks on the phone while working on the floor of the New York Stock Exchange. (Photographer: Michael Nagle/Bloomberg)

Modi Woos Index Funds by Opening Bonds Wider to Foreigners

(Bloomberg) -- Indian Prime Minister Narendra Modi’s government plans to allow foreign investors greater access to short-term and long-term government securities in a bid to tap money being poured into passive funds operated by firms such as BlackRock Inc.

Certain categories of sovereign bonds will be fully opened to non-resident investors, apart from being available to domestic investors, Finance Minister Nirmala Sitharaman said in her budget speech Saturday. The government will take a decision as early as within a month, Economic Affairs Secretary Atanu Chakraborty said in an interview on Sunday.

“Most of the bond investors now largely invest through indices,” Chakraborty said. “Recently, BlackRock, their big fund has become one of the largest funds using the passive investing route. So we shouldn’t miss that as that is a large investment.”

The move is seen as a precursor to India getting its securities included in global bond indexes. It gives foreign investors access to a high yielding market, while India can tap overseas savings as it ramps up spending to revive an economy growing at the slowest pace in a decade. BlackRock, the world’s biggest asset manager, attracted record inflows last year that boosted its holdings to $7.4 trillion, more than two-thirds of which is in products linked to indexes.

India will decide on the plan before the borrowing schedule for the year starting April 1 is announced, Chakraborty said. The finance ministry is in discussion with the central bank on the securities to be offered.

“Both -- the securities which are in demand and the ones which have longer tenure -- would be opened,” Chakraborty said. Given the possibility of sudden and huge inflows, authorities will probably offer a mix of three or four bonds across tenures, he added.

A portion of the budgeted borrowing for the next fiscal year would come from a planned exchange-traded fund of sovereign debt securities, Chakraborty said, adding that this is more likely in the second half of the year as the ETF needs to be structured.

India’s benchmark 10-year sovereign debt yields about 5 percentage points more than similar-maturity U.S Treasuries. However, foreign investors turned net sellers of Indian government debt in January for the first time in four months as expectations grew of a wider budget deficit.

Foreigners are allowed to hold upto 30% of the outstanding of any sovereign bond. Overseas funds hold less than 4% of the 60 trillion rupees of securities issued by India, lower than the 6% limit on international ownership — and most of these holdings are in debt maturing within three years.

Bloomberg LP, the parent company of Bloomberg News and Bloomberg Barclays Indices, had announced it would help Indian authorities navigate a course to inclusion in international bond benchmarks. Bloomberg Economics estimates this inclusion could lure anywhere between $50 billion to $125 billion of new investment in the Indian economy as local savings wane.

Sitharaman on Saturday projected a fiscal shortfall of 3.8% of gross domestic product for the year through March instead of the 3.3% targeted earlier. However, market borrowings for the next year meet expectations. Ten-year yields fell as much as 11 basis points to 6.49% on Monday.

Modi Woos Index Funds by Opening Bonds Wider to Foreigners

“There are a couple of things the market will take heart from,” Ananth Narayan, a professor of finance and former South Asia head of financial markets at Standard Chartered Plc, told BloombergQuint. First is that the Reserve Bank of India is using unconventional policies to support bonds and can now even directly buy debt from the government, he said.

“And second, this step that has been taken in the budget to help include Indian bonds in global indices,” Narayan said.

Chakraborty said the government won’t ask the central bank to buy bonds directly. Traders and strategists had been concerned that such a move would distort prices and discourage fiscal discipline.

“We have a fairly large sized absolute borrowing program,” Chakraborty said. “So it’s important to get the money that is being saved abroad to participate in the Indian market.”

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.