Macroscope | Fears of ‘hot money’ flows temper India’s desire to join global bond indices

There is massive scope for further inflows into India’s bond market, and China’s success shows index inclusion can have great benefits

New Delhi has reason to be wary of speculative money flows, though, and bond market liberalisation could not come at a more perilous time

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People check market prices on a display screen outside the Bombay Stock Exchange building in Mumbai, in July 2019. Photo: AP

Published: 2:33pm, 1 Sep 2022

A cursory glance at levels of foreign ownership in local currency bond markets in developing economies reveals where the greatest untapped opportunities for overseas investors lie.

In China and India – the largest and second-largest debt markets in the developing world in terms of value and the number of outstanding securities – foreign investors’ share of central government bonds currently stands at 10 per cent and 1.7 per cent respectively, according to JPMorgan data.

For an indication of just how low these levels are given the size of both countries’ economies, South Africa, the Czech Republic and Malaysia – which do not even rank among the world’s top 30 economies – all have shares of foreign ownership ranging between 23 and 29 per cent, according to JPMorgan.

However, for many foreign investors, the huge scope for further inflows into the domestic bond markets of Asia’s two biggest developing economies is a key driver shaping global capital markets. China has already made significant progress in opening up its debt market, partly by allowing its sovereign bonds to be included in global indices compiled by Bloomberg, JPMorgan and FTSE Russell.

Index inclusion has contributed to the influx of foreign capital in the past several years. Last year alone, foreigners bought almost US$90 billion of Chinese central government bonds, accounting for nearly half the total inflows into Asia’s local currency debt markets, according to JPMorgan.

The rapid pace of inflows is striking in a country that is notoriously wary of capital flows. Although foreign ownership as a percentage of the outstanding stock of central government bonds has doubled since 2018, China has maintained strict controls on its capital account, ensuring the bulk of the nation’s vast household savings has remained trapped within its borders.

.css-1m2rp1p{color:#34b8b5;}Macroscope | Fears of ‘hot money’ flows temper India’s desire to join global bond indices

Macroscope | Fears of ‘hot money’ flows temper India’s desire to join global bond indices