BNP Paribas India has released a Markets 360 – Strategy & Economics Report wherein Chris Poh, Economist, APAC, andChandresh Jain, Rates and FX Strategist, Global Markets APAC has shared his views in detail.

Appended herewith are the key takeaways of the report:

India: Index inclusion; inflation; change in policy stance

Key Messages:

• Besides lowering government bond yields and appreciating the INR, India’s bond index inclusion is a net positive for growth via the fiscal multiplier channel. As foreign ownership of government bonds improve, so should India’s fiscal multiplier, in our view.
• India’s macroeconomic environment continues to be marked by high growth rate and moderating inflation. However, inflation outlook is likely to be more volatile during June-September period, in our view.
• Therefore, we think August is too early for the RBI to change their monetary policy stance. Any change in stance will probably have to at least wait until October, in our view. We retain our expectation of the first rate cut in December. The risk to our view is of a delay in the start of easing cycle to 2025.

The inclusion of Indian Government Bonds (IGBs) in the flagship JP Morgan GBI-EM starts this Friday, 28 June. The inclusion will be staggered over a 10-months period with a 1% weight increment every month until India’s

weight in the index reaches the maximum threshold of 10% by end of March 2025.

Besides the immediate market impact of lower government bond yields and stronger INR, we highlight that there are also medium-to-long term implications on the Indian economy. Here are some potential benefits

• Encouraging government expenditure: The inclusion of India’s bond in the GBI EM index can significantly bolster the nation’s growth narrative. The development may empower the government to increase expenditure, potentially running larger deficits without concerns of funding, as global investor inflows can potentially finance the structural balance-of-payment deficits in the medium term. This can be achieved without significantly curtailing growth-oriented infrastructure expenditure.

Higher foreign ownership of IGBs is a net positive for growth via the fiscal multiplier channel as well. Countries with a large share of public debt held by foreigners typically have fiscal multipliers larger than 1.0, whereas countries with a small share of public debt held by foreigners typically have fiscal multipliers around 0.0

• Boosting lending by local banks: As a new investor base emerges, local commercial banks may see a gradual reduction in their mandatory holding of Indian Government Bonds (IGBs) as part of their Statutory Liquidity Ratio (SLR) reserve requirements. This would enable them to allocate capital towards more productive economic activities, thereby enhancing lending.

• Facilitating corporate fundraising: The benefits of index inclusion extend beyond the government, offering Indian corporations the opportunity to raise capital at reduced costs. The influx of foreign investors into the government bond market can stimulate demand for other fixed-income securities, including corporate bonds. India’s domestic corporate bond market has largely been overlooked by foreign investors, but inclusion in global bond indices may alter this landscape.