'Sovereign borrowing costs may go down, could boost Rupee': CEA on India joining JPMorgan bond index

India’s sovereign borrowing costs could go down over a period of time and even lead to an appreciation of the Indian Rupee following the inclusion of India in JPMorgan’s Emerging Bond Market Index from 2024, said chief economic advisor V Anantha Nageswaran on Friday.  

“Yes, everything else being equal, an additional or incremental source of demand should see the Indian government’s borrowing costs come down but the order of magnitude is difficult to determine at this stage.,” he told reporters in response to a question on whether the sovereign borrowing costs for India would go down.  

He, however, cautioned that this would also depend on other factors. “If you look at it, the Indian 10-year treasury bond yield has not risen despite the sharp run up in the US government 10-year bond yield to 4.5%. So much so that the spread between the US 10-year Treasury and the Indian 10-year G SEC has come down well below 300 basis points. So, I think the Indian bond market is already performing well and the cost of capital and liquid terms is already very reasonable. It might come down somewhat even further,” the chief economic advisor said.

He also said that there will be a tendency for the Indian currency to appreciate just as it happened between 2003 and 2008.  

“There is a demand for investors to buy the Indian government bonds... there is a potential for currency appreciation, when the index inclusion starts to happen or the demand from investors for the Indian government securities starts to rise," he further said.

JPMorgan has announced that it will include Indian government bonds (IGBs)in its emerging markets bond index from June 2024, a development that is likely to bring in billions of dollars into the economy. As many as 23 IGBs with a combined notional value of $330 billion are eligible. The inclusion will be staggered over 10 months starting June 2024 till March 2025 at roughly 1% weight per month.

Welcoming the development, the CEA said the benefits of the index inclusion appear to outweigh the concerns and challenges, which other countries are also facing.  

He also highlighted that macro prudential policies will also become more critical now. “We need to also balance in the long term the foreign investment flows, along with macro prudential considerations, because ultimately while foreign investors are looking to invest in India for its macroeconomic policy, this very act of their investment interests should also not jeopardize the macro stability,” he said.  

The government is also hopeful that “long term patient investors into Indian government securities will also benefit in terms of commensurate economic returns”, he said, noting that portfolio investors in equity markets in India have benefited over the last 30 years from their investment in Indian equities.  

He also highlighted that the bond index inclusion would be a source of financing for the current account deficit. “There will be challenges in terms of the pressure on the currency to appreciate and also sensitivity of domestic policies to external investors preferences and also sensitivity of domestic policies to external events,” he said, adding that when external events create financial market volatility globally, it would impact our government security yields and currency because these investors will be reacting to global developments on the rest of the portfolio. The investors will then decide on either increasing or decreasing their exposure to the Indian market, but these things are to be expected," he further said.

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