The inclusion of Indian government bonds into J P Morgan’s EM bond benchmark will increase investment flows into the country and allay fears about a weakening balance of payments (BOP) position due to high oil prices, according to economists.
The team of economists at global bank Barclays in an impact note said, “While most of the inflows will come next year, we also expect some additional front-loaded inflows in FY23-24 as active fund managers take positions before actual inclusion.” It estimated that these inflows could be about $10 billion through the rest of the year, implying they should be enough to offset the risks from higher oil prices.
A $10 per barrel increase in oil prices worsens India’s current account by nearly $10-12 billion (30-32 basis points of Gross Domestic Product). “This keeps the BOP in nearly the same position as our forecast even if oil prices average $10 per barrel above the $85 per barrel estimate incorporated in current account forecasts,” Barclays added.
Madan Sabnavis, chief economist at Bank of Baroda (BoB), said the inclusion would mean more foreign exchange coming into the country. This could be $30 billion or so to begin with and build up over time. This is good for India’s BOP and could see reserves going up. This will, however, depend on how the Current Account Deficit (CAD) and other capital flows behave.
Madhavi Arora, Lead – Economist at Emkay Global Financial Services, said apart from the passive flows owing to the one-time stock adjustment, this move could lead to fresh active flows in the debt market. It will help India to finance its fiscal and CAD as well as enhance the liquidity and ownership base of GSecs. “We see upside risk to our FY24E BOP surplus of $10-12 billion, but keep an eye on net flows, which may be influenced by factors other than bond inclusion (such as global risk appetite, external growth dynamics),” Arora added.
First Published: Sep 22 2023 | 9:01 PM IST