“India’s inclusion in global indexes has increased foreign participation in local debt. In the long run, such a high proportion of FPI (foreign portfolio investor) inflows in government securities may pave the way for a reduction in the statutory liquidity ratio,” said Geeta Chugh, MD, sector lead, financial services ratings, S&P Global.
At present, the majority of Indian sovereign debt is owned by the banks and financial institutions, several of which have significant state ownership. The SLR refers to the portion of banks’ net demand and time liabilities-a proxy for deposits-which must be deployed in liquid assets such as cash, gold and government securities, according to Reserve Bank of India norms . A bulk of SLR is in the form of investment government securities. At present, the SLR is at 18% of net demand and time liabilities.
In September 2023, JP Morgan announced the inclusion of fully accessible Indian government bonds in its EM bond index, effective from June 28, 2024. India is expected to reach a maximum weight of 10% in the GBI-EM Global Diversified Index over a 10-month period. Assuming an index neutral position, JP Morgan’s analysts expect foreign investment worth $20-$25 billion to flow to the Indian government bond market from inclusion.
FPI investment in fully accessible government bonds has increased by $17.45 billion since September 2023, Clearing Corporation of India data showed.”Increase in foreign investment in India’s public sector debt will ease reliance on domestic funding sources, and this will significantly increase the capital available for the country’s bond market,” S&P Global’s economists wrote.The economists said that the future development of India’s debt capital markets would require action from the government to improve market access and settlement procedures. This would likely usher in greater participation in domestic markets along with increased scrutiny of bonds and possible volatility that come with it.
“S&P Global’s base case, after adjusting initial estimates, is that foreign participation in government debt will gradually increase and help lower the existing crowding out effect in domestic debt markets,” the economists wrote.
In the period between March 2023 and March 2024, domestic bank holdings of central government bonds rose 14%, outpacing 11% growth in the stock of central government bonds, the economists said. They pointed out that holdings of central and state government securities since 2023 continue to account for 26% of total banking sector assets.
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