Bloomberg defers decision to include India government bonds in global aggregate index

MUMBAI: Bloomberg Index Services on Friday deferred the inclusion of Indian government bonds in its flagship Global Aggregate Index, disappointing investors who had expected that recent tax changes would help the South Asian nation’s debt gain entry.

Inclusion in the index typically leads to increased foreign inflows into the debt market and helps boost the country’s currency — the Indian rupee has depreciated 5.5% so far this year.

Bloomberg Index Services Ltd (BISL) said it will continue to assess Indian government bonds for inclusion in the index.

“BISL believes the Indian government bond market continues to make meaningful progress toward meeting the standards expected for inclusion in the Bloomberg Global Aggregate Index,” it said in a statement.

“However, given the significance of recent market enhancements and the importance of ensuring they are fully reflected in day-to-day market practice, BISL believes  additional time is warranted for these developments to become more firmly established before making a decision,” the statement said.

In June, New Delhi scrapped taxes on interest earned and capital gains on government securities, effective April 1.

Before the change, foreign investors were subjected to a 12.5% long-term capital gains tax on bonds held for more than 12 months, and a 20% withholding tax on interest earned from government bonds.

The Reserve Bank of India also broadened the pool of securities available for foreign investors without any investment limits by including 15-year, 30-year and 40-year bonds.

The changes brought in $6.8 billion in foreign flows into Indian government bonds, with positions being pared in the last few days from a peak of $7.5 billion in inflows.

Bloomberg’s decision to defer the immediate inclusion of Indian bonds could lead to more selling and push up bond yields.

“This comes as a big negative surprise and the 10-year bond yield could touch 6.90% on Monday, and even a test of above 6.90% levels is possible before the RBI policy decision,” said VRC Reddy, treasury head at Karur Vysya Bank.

The RBI is expected to keep its key interest rate unchanged at its policy meeting on August 5.

Reddy also expects the local currency to drop in Monday’s trading session, but said the extent of the decline will depend on the pace of intervention from the central bank.

The Indian rupee ended 0.3% higher at 95.38 against the dollar on Friday, while the 10-year benchmark 6.94% 2036 bond yield ended at 6.8343%, up for a third week.