JPMorgan Investor Summit: Sajjid Chinoy On Why It's A Good Time For India's Inclusion In EM Bond Index

India's inclusion in the widely tracked emerging market index was "inevitable", JPMorgan Chase & Co.'s Sajjid Chinoy said on Monday.

"If you want idiosyncratic one-off flows, you want your flows to be counter-cyclical," the chief India economist at JPMorgan India told BQ Prime's Niraj Shah on the sidelines of the India Investor Summit Mumbai. "You want them at a time when FDI flows have slowed and the current account is wider because oil prices have gone up. So, this is a good time."

Over the next couple of years, India's inclusion into the index would pave the way for more than $20 billion of stable dollar inflows into the country's bonds. This comes at a time when the foreign fund inflows into Indian debt have slowed down due to tightening financial conditions across the world.

On an annual basis, foreign portfolio investors have largely withdrawn funds from Indian debt over the last four financial years since 2018-19, with an exception in 2021-22 when the number stood at $256 million on net basis, according to National Securities Depository data. In 2017-18, the FPIs bought bonds worth $18.5 billion on a net basis.

The flows related to the index inclusion were passive in nature, according to Chinoy, as they are good for price discovery and the overall health of the country's bond market.

As and when these dollar inflows hit the market, it would also add to the rupee liquidity in the system as a result of the potential absorption of such flows by the Reserve Bank of India. Considering that the RBI is seemingly keener to keep liquidity in deficit, they might sterilise the addition by selling government bonds.

"While this is very supportive for the BoP (balance of payments), from a bond market perspective, it potentially changes the RBI's balance sheet away from net domestic assets to net foreign assets," he said.

Continued Mop-Up Of Dollars

The country is in a "very, very comfortable" position on the RBI's foreign exchange reserves, Chinoy said. However, the central bank must continue purchasing dollars to ensure macroeconomic stability in the event of any adverse global phenomenon, he said.

Any sharp appreciation in the rupee against the dollar may also need to be curtailed when index-related flows knock on doors, Chinoy said.

The foreign fund inflows due to index inclusion may be good for price discovery and the overall health of India's bond market, he said. 

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