{"id":135005,"date":"2023-10-05T07:39:03","date_gmt":"2023-10-05T07:39:03","guid":{"rendered":"https:\/\/allmybiznews.com\/?p=135005"},"modified":"2023-10-05T07:39:03","modified_gmt":"2023-10-05T07:39:03","slug":"bond-inclusion-will-lower-cost-of-capital","status":"publish","type":"post","link":"https:\/\/allmybiznews.com\/business\/bond-inclusion-will-lower-cost-of-capital\/","title":{"rendered":"‘Bond inclusion will lower cost of capital’"},"content":{"rendered":"

‘The cost of financing the fiscal deficit will decrease, as new passive investors join in.’<\/strong><\/p>\n

<\/p>\n

Vikas Goel<\/strong>, MD and CEO at PNB Gilts spoke to Anjali Kumari<\/strong>\/Business Standard<\/em> on the impact of JPMorgan’s inclusion of Indian bonds in its global index, in a telephonic interview.<\/p>\n

What will be the overall impact of bond inclusion in the near term and long term?<\/strong><\/p>\n

In the near term, which I define as two events — beginning today, the announcement, and the actual flow which will start only in June –active traders will start taking interest in India, front-running the passive investors.<\/p>\n

This is the beginning. There are two or three other indices that may also include India.<\/p>\n

So, the market will remain big.<\/p>\n

However, there are concerns that the actual flow will start in June, which has dampened Friday’s euphoria.<\/p>\n

In the long term, we’ll see several positive outcomes.<\/p>\n

First, the cost of financing the fiscal deficit will decrease, as new passive investors join in.<\/p>\n

This will also lower the overall cost of capital in the country, benefiting corporate bonds and capital formation.<\/p>\n

Secondly, India will become more connected to global fixed income markets, potentially facilitating more efficient financing of infrastructure projects.<\/p>\n

The discussion about bond inclusion has been ongoing for some time. Why do you think the decision was taken at this particular time?<\/strong><\/p>\n

The concerns in question revolved around two key issues — withholding tax and the challenges faced by smaller market participants, who tracked an index.<\/p>\n

But they lacked the necessary infrastructure for onshore operations.<\/p>\n

These smaller players sought offshore clearing and settlement through Euroclear, leading to a dual focus on taxation and infrastructure.<\/p>\n

The situation became more complex as it touched on the taxation of onshore bonds traded offshore and domestically-issued bonds denominated in rupees being traded offshore.<\/p>\n

Intense debates ensued on these matters. In the context of BRICS, India was the only member absent from the index.<\/p>\n

With Russia’s exit, India became the only viable market globally offering yield.<\/p>\n

Bond investors and passive funds were compelled to engage with India to deploy their assets.<\/p>\n

During negotiations, there was a clear desire for a favourable outcome.<\/p>\n

However, India was in a strong position due to its government’s fiscal prudence.<\/p>\n

In essence, India’s inclusion in the index happened on India’s terms, driven by its fiscal strength and the concessions made by the index providers, rather than India compromising its position.<\/p>\n

Do you think this inclusion will impact the borrowing pattern of the government?<\/strong><\/p>\n

I don’t believe it will have a significant impact on the borrowing pattern.<\/p>\n

Most investments will be in the 5 to 10-year range, which aligns with the current government’s borrowing structure.<\/p>\n

The demand will focus on securities between 5 and 14 years, so we may see a slight increase in the issuance of those tenors.<\/p>\n

However, the overall borrowing pattern will remain relatively consistent.<\/p>\n

The yield curve has been flat for a while. When do you see the situation improving?<\/strong><\/p>\n

I believe the yield curve’s flatness can be attributed to the elevated levels at the short end.<\/p>\n

This elevation is a result of the Reserve Bank of India (RBI) maintaining an overall tight monetary policy stance while gradually withdrawing accommodation.<\/p>\n

Currently, liquidity conditions are exceptionally tight, as reflected in the NSE MIBOR fixings, which are even higher than the Marginal Standing Facility (MSF) rate of 6.75 per cent.<\/p>\n

Consequently, the shorter end of the yield curve, spanning 1-2 years and 3 years, remains elevated.<\/p>\n

However, I anticipate that as liquidity is normalised, it will serve as a precursor to the RBI initiating rate cuts.<\/p>\n

In my view, the era of interest rate hikes has concluded, and now the focus is on when the rate cuts will commence.<\/p>\n

The reinstatement of accommodation will likely occur in two phases.<\/p>\n

Firstly, liquidity will shift from being negative to positive in the system, paving the way for the RBI to consider rate cuts, possibly within the next 9 to 12 months.<\/p>\n

If, in the next 2-4 months, inflation begins to trend down as anticipated, the RBI may begin using liquidity as a tool.<\/p>\n

This, in turn, will bring down short-term rates, ultimately diminishing the flatness of the yield curve.<\/p>\n

Do you have any estimates of the amount of inflows expected after the inclusion?<\/strong><\/p>\n

As of now, the estimate is around $21 billion, but this amount could vary.<\/p>\n

It will be approximately 10 per cent of the assets under management (AUM).<\/p>\n

Depending on the AUM size at that time, it could be more or less than $21 billion.<\/p>\n

Additionally, if inclusion happens in more indices, the total inflow could reach as much as $50 billion.<\/p>\n

Feature Presentation: Aslam Hunani\/Rediff.com<\/em><\/strong><\/p>\n

Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

‘The cost of financing the fiscal deficit will decrease, as new passive investors join in.’ Vikas Goel, MD and CEO at PNB Gilts spoke to Anjali Kumari\/Business Standard on the impact of JPMorgan’s inclusion of Indian bonds in its global index, in a telephonic interview. What will be the overall impact of bond inclusion in the near term and long […]<\/p>\n","protected":false},"author":3,"featured_media":135004,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[],"yoast_head":"\n'Bond inclusion will lower cost of capital' - All My Biz News<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/allmybiznews.com\/business\/bond-inclusion-will-lower-cost-of-capital\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"'Bond inclusion will lower cost of capital' - All My Biz News\" \/>\n<meta property=\"og:description\" content=\"‘The cost of financing the fiscal deficit will decrease, as new passive investors join in.’ Vikas Goel, MD and CEO at PNB Gilts spoke to Anjali Kumari\/Business Standard on the impact of JPMorgan’s inclusion of Indian bonds in its global index, in a telephonic interview. 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