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00:00 much for tuning into BQ Conversations. I'm your host, Neeraj Shah with Tamannaah Inandar.
00:04 And the big news of the day is India's inclusion in the or forthcoming inclusion in the Global
00:11 Bond Market Emerging Market Index. To make sense of this, the implications short term,
00:16 medium term, long term, two very important guests, Arshad Kumar of Axis and Jayesh Mehta
00:21 of Bofa join in. Gentlemen, thank you so much for taking the time. Arshad, let me start
00:25 off with you. Your first thoughts. I mean, this was a long time coming, finally happening.
00:31 Initial reaction. Yeah, I think it's something we've been waiting for a long time. It's many
00:38 years and you know, every year this gets pushed back. And in fact, there was a point of time
00:43 after the budget this year when there was no announcement regarding this that people
00:47 thought that this has been put on the back burner. So certainly it's welcome news in
00:52 terms of being included in the global bond index. Of course, many steps have been taken
00:57 over the years. This is a culmination of all of that. So the initial market reaction obviously
01:01 is very strongly positive. You've seen yields drop by seven, eight basis points that open
01:07 and markets are reasonably well-baked. And if you look at the bond markets over the last
01:12 few days, despite the global sell-off, our bonds have held value largely because of some
01:16 anticipation that before the end of this month, the anticipation has gone out this time, was
01:22 belied last year. I'm happy to note that this is really welcome news for our markets in
01:29 terms of longer term growth, development, liquidity, etc.
01:32 All right, let me get in Jayesh Mehta as well. Jayesh, great to have you on the show and
01:37 great to speak with you on a very, very important day. Some estimates say about $30 billion
01:43 of inflows coming in. Do you have a number in mind? And will this also have a domino
01:48 effect of the inclusion of Indian bonds in more indices?
01:53 Of course, it will be included more into the next. We expect it to be in the Bloomberg
02:00 index. But JP Morgan index is the one which is mainly followed and tracked. And that's
02:08 the rough estimate people have, because they're kind of going by 2X number. It could be more
02:15 because when you have something included in index, not only the index followers, even
02:22 other central banks and all kind of tend to get more comfortable. And therefore, I would
02:29 expect the flows to be much larger than that. But that's, of course, over a period of time,
02:34 maybe 24 to 27, 26, 27. That's when you will see larger flows. Maybe the 30 billion is
02:43 what we should see in 24, 25. But beyond that, we will be seeing higher numbers. And of course,
02:51 it's also a factor of emerging market bond AUM growth also. So that also one needs to
02:58 factor in.
02:59 Do you have a ballpark figure in mind when you see a higher number by 26, 27?
03:06 So right now, we are assuming with like 30 billion is the number which is floating around,
03:11 which is kind of assuming maybe like 1.8 times the emerging market bond investors. We have
03:19 typically seen to maybe 2.5 to 3. So maybe another 50% or maybe another 25% higher would
03:28 be possible. And so basically, it can go up to 40 billion kind of situation in the next
03:35 four, five years.
03:38 Just before we let you go, though, in a world fraught with higher yields, what does this
03:41 mean for the intermediate period until the inclusion happens? And now?
03:48 That's why you see the reaction today. There is of course some profit booking happening.
03:52 It opened at 7.07, went up to 7.11. So if US macro would have been conducive, US yield
04:00 would have been lower. We would have seen the opening today at 6.90, right? But that's
04:05 because right now, as you said, global yields are higher. And therefore, otherwise, what
04:11 happens is the real guys, the people who are tracking the index, 1.1% they will start doing
04:16 from June, right? But other hedge funds or other traders and stuff like that, they're
04:23 not going to wait for first June.
04:24 But right now, it could not be that easier to just go there with US yield being almost
04:31 around 4.5%. That's where it is kind of giving us, which is good, actually, it's giving us
04:40 slow, slow, slow rise.
04:42 Yeah. Yes. So, Jayesh, appreciate you taking the time out being with us. Thanks for your
04:47 time.
04:48 Thanks.
04:49 All right. Siva, now, these two or three questions to you and more. First, the point that Tamanna
04:54 asked, Jayesh, as well. One is, let's assume the longer term impact of this particular
04:59 event is well documented, though I would love to understand from you on that. And two, the
05:05 domino effect of what this does in terms of other indices and also in terms of idiosyncratic
05:11 buying that other global funds would do, which they might not be doing right now, because
05:17 it was not there in the benchmark any which ways.
05:19 Yeah, I think these are all very important considerations, right, from our perspective.
05:26 I think the point that Jayesh is making and the point that you made just now, which is
05:30 that what is the, in some sense, non-index linked buying, I think becomes extremely important
05:35 to build there. What is well documented in some sense is the size of the funds which
05:41 track or which are benchmarked to the EMBI and therefore, this estimate of little over
05:45 20 billion of flows.
05:46 So, then, how do we build up an estimate from there is to look at what are potentially the
05:53 kind of monies which are not directly benchmarked to the EMBI, but which tend to track EMBI
06:00 and that would include, as Jayesh also mentioned, certain sovereign wealth funds or other investors
06:04 who would follow. And then, of course, the domino effect, which you mentioned, that this
06:10 opens the path, hopefully, for other benchmarks also for inclusion or for linked buying inclusion.
06:16 Now, remember that India is not the first global index or a regional index we've been
06:21 part of. For example, we are part of certain HSBC emerging market indices and certain
06:25 other EM indices, EM local indices already, but they tend to be much smaller in size.
06:30 What is really important is to get into some of these big global benchmarks because they
06:36 have a material impact in terms of flows. So, I think, obviously, the big daddy is,
06:41 for example, the Bloomberg Global Aggregator, etc. That happens over a period of time. And
06:47 obviously, it's going to be a game changer in terms of the global size of flows. So,
06:51 we'll have to see. I don't see this as an automatic domino, but certainly, this will
06:55 start a conversation in many asset management companies and index providers that India is
07:00 an important place. What's also important is that this has happened
07:07 at our own terms. So, in the sense that the sort of what is considered to be blocking
07:13 events such as tax and the withholding tax and bonds and the clearing and settlement,
07:19 etc. seems to have not played much of a concentration. That is to say that the index providers and
07:25 the investors seem to be comfortable in paying bonds even without it being settled on overseas
07:30 exchanges and trading platforms. All of these are important. I think it's important that
07:35 we recognize that this step is just the first step. Hopefully, there will be a lot more.
07:40 As RBI also develops comfort with global investors investing in India, hopefully, the RBI also
07:45 will be more comfortable in allowing Indian bonds to be settled on global exchanges, which
07:49 will then make it. That's the real domino effect or rather the kind of tip-top effect
07:54 where there's one move here and there's a corresponding move on the other side. So,
07:58 the dominoes are going to take the next step. Certainly, I think we'll see way more positivity
08:04 towards the Indian bond. Siva, actually, just two very, very crucial
08:08 points. One, that you mentioned, that one, it's happened on our own terms, part one.
08:14 And two, the layer that I'm adding is that the most spoken about bond market inclusion
08:20 was the JPM one. Now, yes, it may not be an automatic domino, but does it, in a sense,
08:29 open up and make other indices hasten the process if they're hitherto were not because
08:37 JPM was the most talked about? And could that also happen at our own terms?
08:43 Yes, I mean, yes, I don't know. Of course, there's no way to prove this one way or the
08:48 other. But let me say this way, that what this tells you is that there is a larger acceptance
08:55 of Indian bonds, in this case, Indian gills, in the global investor community. So, the
09:01 index provider is, in a sense, reacting to the demand from their customers who are asset
09:05 management companies globally. So, in a sense, Indian GCECs are finding acceptance in global
09:13 asset management. And the same feedback will be going to other index providers, too. So,
09:18 I think the point is that as investors, that is to say, AMCs globally, get used to investing
09:25 in Indian GCECs, that will translate, in my opinion, to other index providers also following
09:31 suit. Whether that happens on our terms, etc., that remains to be seen. But I think, in some
09:42 sense, the success of this first step in implementation can give a lot of comfort to other index providers
09:48 that Indian GCECs can be traded in India successfully with access to liquidity, with access to settlement,
09:54 etc. And that might provide the kind of comfort that index providers would need.
09:59 Sima, let me come in with a sort of a, I would say, broader and simpler point of view of
10:08 why this is such a big deal. I mean, geopolitically, it's coming at a time when Russia, of course,
10:13 has fallen out of favor. China is looking a bit iffy. India has a growing acceptance
10:19 globally of inherent strength in the economy. And is that why also, of course, beyond the
10:25 excitement of the markets today, this is really a big deal. Can you give us some perspective
10:30 on that? Yeah, I see the point here is very important.
10:37 It's been a long, you know, 20-plus year journey that we've been talking about this whole capital
10:41 convertibility and inviting global investors, etc. And it's been only an equity story so
10:47 far. Fixed income investors in India have been essentially traders, those who want to
10:53 take the, to use Niranjani's word earlier, reducing credit investors, those who want
10:57 to take a punt on India or a currency. So we have not really had stable long-term flows
11:03 into Indian G6 or into Indian bonds in general, because we've never really participated in
11:07 that kind of type of flows. So I think this, therefore, is an extremely important step
11:12 to integrating our markets with the rest of the world. As we become a part of a larger
11:17 pool of money, it also will lead to more institutional tracking of Indian macros, Indian rates, and
11:25 commentary, etc., which is historically lacking, because no one has invested here. I think
11:31 in all of these respects, we should welcome this. This is the macro longer term, I think
11:35 development that we should be really welcoming as a result of this time. Now, coming to the
11:41 other point, you know, the tactical aspects in some sense, as you mentioned, for example,
11:44 India may knock down some of these indexes. But even without Russia aspect, I mean, if
11:50 you look at India will become a 10% weight in the index. Why? Because there's a 10% ceiling
11:55 on a single country. So we are already a large bond market, and we are the largest market
12:00 not covered in this index. So in that sense, there's always an outstanding pressure from
12:07 a global diversified investor community that why is it that one of the largest emerging
12:12 market bond issuing countries is completely underrepresented. So from the investor perspective,
12:19 this need to be in India is definitely seen, we are relatively better off, of course, you
12:23 know, remember the taper tantrum for 10 years ago, but that's a decade ago. And I think
12:27 the reality is that the currency has done reasonably okay, in fact, remarkably stable
12:32 over the last several months. And all of that will also contribute to the confidence that
12:37 global investors have in investing in India, apart from the normal things that people look
12:42 at like, you know, stability, macro stability, financial stability, etc, which have also,
12:47 I think, improved significantly over the years.
12:49 Siva, last one or two questions very quickly. One, what happens to actually, let me first
12:56 ask about the flip side of this, we have fairly an event driven country, the going is good
12:59 right now. But this opens the tap both ways, anything that and there have always been a
13:04 conversation about how the Indian bond market lacks the depth. Now, my question to you is,
13:10 is there something that we need to within as well to ensure that, you know, things don't
13:14 go all right, when the reverse side is ongoing.
13:18 So the good news here is that when you're part of an index, you don't get trader flows,
13:23 right, you get investor flows. So the, let's say you're 10% of an index, and roughly you
13:28 will be 10% some the ETFs will give you exactly 10%. And non ETFs will be plus or minus depending
13:34 on the active view of the fund manager, but in and around 10%. So, in that sense, that's
13:39 allocation money, that's not trader money. So you don't have to worry about that flighty
13:42 nature, which today is the case, wherein only money which comes to you is because someone
13:46 has taken a punt on it. And therefore, that money can fly out at short notice. So that's
13:51 a good news. So let's celebrate that. But we must be aware that this will increase the
13:58 scrutiny of India in the global scheme of things, we will be compared to other countries,
14:02 there will be commentary which talks about, for example, Indian fiscal health relative
14:05 to Indonesia or China or Malaysia or someone else. And so we need to be prepared that we
14:11 will be held to greater account in the global commentary, even if not in terms of flow.
14:16 And I think it is something we need to be aware of, which I don't think the risks in
14:20 this case are too high, I think the risks are really low. I think that we tend to worry
14:25 about this flip side. But I think in this at least particular instance, I have not seen
14:31 too much of concern that we should be having about the negative implication of this inclusion.
14:39 Great. So thanks so much for putting all of this into perspective. Much appreciate you
14:45 taking the time out and being with us on the show.
14:46 Thank you, Neeru. Thank you, Ramana.
14:49 And viewers, thanks for tuning in.
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