India is a developing country and the corporates, as well as the Indian government, needs a huge amount of money at cheap rates to finance its growth. In order to broaden India’s pool of available money, the Modi government is mulling over the listing of India’s sovereign bonds on global indices.
A few weeks ago, the Indian government brought the Taxation (Amendment) Bill to put an end to retrospective taxation for once and all. The foreign investors were shying from Indian Government bonds (IGB) due to lack of clarity on the taxation side, and this was among the major demands to clear listing on international indexes.
With the retrospective taxation case with Cairn and Vodafone in the last stage of resolution, very soon IGBs would be listed on international indexes and the Government of India get access to very cheap capital.
Morgan Stanley Research in a report said the process for listing Indian government bonds in the Belgium-based clearing house Euroclear is expected to be completed by the end of 2021 and consequently, the GBI-EM and Global Aggregate Index would include Indian bonds in their index.
So far, the Scheduled Commercial Banks hold most of the public debt in India and due to this, their private lending suffers. With the listing in the international bond markets, the Indian government would get billions of dollars every year at a very low-interest rate.
“This would push foreign ownership of IGBs to 9 per cent by 2031… In a bull case, foreigners could buy $27 billion a year thanks to well-controlled inflation, a well-managed fiscal deficit and gradual INR appreciation,” Morgan Stanley Research said.
According to various researches, the listing into the global bond index would soften the Indian government bond yields by 50 basis points. In simple terms, if the Indian government is now getting loans and 6.5 percent per annum interest rates, it would get at 6 percent after the listing. And this means the government would save billions of dollars every year in interest rate payments.
“Considering IGBs’ bond yield of around 6 per cent, it could offer 4 per cent USD return over the medium term, quite attractive to foreign investors,” Morgan Stanley Research wrote.
The Indian government is considering various other options in order to get access to cheap loans to finance the large capital expenditure plans. One such option is opening up the government debt to retail investors, for whom investment has become super-easy thanks to the democratization of investing through digital technology.
The mutual funds and Indian equities markets have benefitted immensely from this democratization as retail investors pumped billions of dollars. The Indian government is also willing to capitalize on this and open its debt to retail investors. RBI is working on a framework to open the government bond for retail investors.
“We have already opened investments through the fully accessible route and securities across the curve are available from five to 30 years. We will definitely open up more securities on a need basis,” said an official.
With access to cheaper capital, the Indian government would be able to build roads, railways, piped gas, water, and all other kinds of required infrastructure very efficiently and this will accelerate the economic growth in the coming years.
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