Big Bond Bang reignites Indian Gsec hopes in global portfolios

Bloomberg's review of its flagship global index is scheduled for mid-June this year

- MANOJIT SAHA

The decision to exempt foreign portfolio investors (FPI) from income tax on interest and capital gains earned from government securities (Gsecs) has brightened the prospects for the inclusion of Indian sovereign papers in Bloomberg Index Services’ flagship Global Aggregate Index—a review of which is scheduled by the middle of this month.

In January, independent benchmark administrator Bloomberg Services Index had deferred the decision to include Indian government bonds in its global index, citing the need for further assessment of operational and market infrastructure issues.

For the Bloomberg Global Index, India was being evaluated for a potential weighing of around 1 per cent, an allocation that could have translated into $25 billion of inflows, spread over roughly 10 months, starting from April 2027. If Indian Gsecs are included this time around, the actual inflows could come in FY28, but the announcement itself will boost sentiment.

The tax reforms for FPIs in Indian Gsecs, unveiled last Friday, were initiated with the primary aim of creating a more competitive framework for foreign investment, deepening the sovereign bond market, and strengthening the case for these bonds’ eligibility for inclusion in global indices, said a person involved in the deliberations between the central bank and the government.

The further deepening of the bond market remains a key policy priority for the government, said another person aware of the rationale. "There's a realisation that a deeper and more liquid market requires a diversified investor base that goes beyond the current concentration of domestic banks and insurers to include global institutional investors with large pools of stable capital," the source said.

With FPIs being taxed on interest and capital gains, the effective post-tax yield on Indian government bonds was seen as lagging relative to comparable bonds in peer emerging markets, many of which are already index constituents.