26/09/2023
This was all over the financial press over the weekend with much emphasis on the $25bn or so of FII dollars that will get allocated to India's sovereign debt from funds tracking this index. Speculation is that FTSE Russell will eventually follow suit. This definitely makes borrowing cheaper and longer term yields have already moved downwards in response.
However, in my view, the bigger implication if global institutional investors become a significant part of the trillion dollar Indian sovereign bond market is the forced alignment of India's fiscal governance to global market standards and that in turn will need to extend to Indian polity as well.
The playing field will no longer be just between the central bank and the government. The market forces will demand that the funding of all freebies that get promised in elections be properly accounted for and budgeted. And markets are never shy to pull the trigger. One doesn't need to go too far back in time to study what happened in the UK's GILT market last October on the back of some fiscal imprudence. Rising yields and falling currency is not the beast that's easy to tame for an economy with a large import bill.
As someone said with more power comes more responsibility !
Inclusion expected to drive billions of dollars of inflows in rupee-denominated debt