India: Onshore bond and FX markets Primer (Update)
We update our India’s bond and currency markets primer to factor in a host of recent developments.
Group Research - Econs, Radhika Rao26 Mar 2024
  • India’s eligible bonds will be included in global benchmarks.
  • This will attract investors to the country’s large investable debt markets.
  • Domestic financial markets are amongst the most liquid and developed in the region.
  • On monetary policy, the Reserve Bank of India pursues a flexible inflation targeting framework.
  • Plans for capital account convertibility remain under study.
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Below is a summary. For the full report, please download the PDF


Overview of India’s public debt and fiscal backdrop

India’s domestic bonds are the backbone for the overall securities market. We delve into two primary issuers – central government and states. India’s outstanding government debt markets is second biggest in Asia (central government), behind China. The Ministry of Finance publishes the ownership pattern of Central Government securities on a quarterly basis with one quarter lag. Commercial banks own 38% of the outstanding issuance, followed by insurance companies at 26%, RBI at 13% and foreign investors at ~1.6%. For SDLs, commercial banks, insurance companies and provident funds made up more than 80% of the ownership in FY23, with the latter two typically holding on to securities for the long-term or up to maturity.

Foreign debt portfolio investors are registered with the securities regulator SEBI and classified under two main brackets – Category I & II based on the risk composition. Long-term investors include sovereign funds, pension funds, foreign central banks, etc. Rupee sovereign bonds are poised for further gains on strong foreign inflows, largely frontrunning the upcoming bond index inclusion. JP Morgan is due to start the inclusion by June 2024, and extend over 10 months, with 1% increments on its index weighting, till it likely reaches 10%. Bloomberg Index Services will include India’s bonds in its Bloomberg EM Local Currency index and related indices from January 2025, over a ten-month period to October. Once complete, India would join both China and South Korea as markets that reach the 10% cap in that index.

Overview of India’s foreign exchange market

With the breakdown of Bretton Woods system in the early 1970s and a consequent switch towards a system of managed exchange rates, alongside the declining share of the UK in India’s trade, the Indian rupee (INR) was delinked from the pound sterling in September 1975 [II]. Through the development cycle, in a circular in July 2022, the RBI sought to enhance the mechanism to smoothen settlement of trade transactions in the INR.


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Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]

 
 
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