The government has begun the exercise to gain entry into the JP Morgan Global Bond Index for emerging markets which is expected to bring steady flow of dollars and more foreign investments into the country.
Opening local debt market for foreign investors will however require easing of prevailing rules.
"A team comprising finance ministry officials as well as representatives of the Reserve Bank of India (RBI) and Securities Exchange Board of India (Sebi) has been set up to look into the issue of facilitating government securities to be part of the JP Morgan Global Bond Index," a senior finance ministry official said
The JP Morgan Government Bond Index measures performance and quantifies risk across international fixed income bond markets.
The indexes measure the total, principal and interest returns in each market and can be reported in 19 different currencies. By including only traded issues available to international investors, the index provides a realistic measure of market performance.
The government estimates that it could raise an additional $30-40 billion if it were to be part of the index.
Analysts say, widening of bond market is expected to act as a cushion when the threat of hot money fleeing out of India’s stock markets looms large. This year, the Indian rupee plunged heavily hitting record weak levels against the dollar, driven by investor outflows as concerns about the country’s widening current account deficit mounted.
The opening of the bond market is also expected to balance out India’s high dollar payments for gold and oil imports.
However, the official said that being part of JP Morgan Global Bond Index would not be an easy exercise.
"There are several changes to be made in the present format of government securities before we become acceptable to the bond index," he added.
The joint team of RBI, Sebi and finance ministry officials plan to discuss the issue in detail and try to evolve consensus, the official said.
To qualify to enter the JP Morgan Government Bond Index - Emerging Markets, the government may need to modify rules to allow foreign institutional investors to invest more in the country’s debt market.
India currently has a $30 billion cap on foreign investment in government debt. While the government may not want to do away with the cap entirely, it may consider easing rules to facilitate higher limits.
