Indian bonds closer to be included in global indexes as govt plans tax changes

25 Nov , 2021 By : Kanchan Joshi

India plans some tax exemptions in its budget due February, possibly the final step for the nation’s sovereign bonds to be included in global indexes, according to people familiar with the matter.

Finance Minister Nirmala Sitharaman will propose to exempt Euroclear settlements from tax, the people said, asking not to be identified as the plans are private. If lawmakers approve the budget on schedule, Indian debt could be eligible for index inclusion by the end of March, they added.

A finance ministry spokesman wasn’t immediately available for comment.

The tweak is crucial for inclusion of Indian bonds as Euroclear doesn’t charge capital gains tax on debt transactions. Settlement of Indian bonds on Euroclear, an international securities platform, has been a key demand from index providers such as JPMorgan Chase & Co.

Last month in October, JPMorgan said India’s inclusion in its emerging-market bond index could attract $25 billion of investment from foreign investors.

Actual inclusion will depend on domestic and international developments, Arthur Luk, a JPMorgan Chase & Co. strategist, wrote in a note. Given India’s large weight in the index, the process would likely be staggered over 10 months, similar to China’s inclusion into GBI-EM in 2020, he said.

The U.S. bank’s index team said that Indian government bonds were on track to be placed on index watch for inclusion. The ability to access the market through an international central security depository such as Euroclear, and clarity on taxes were among key hurdles cited by investors.

The eligible bonds under the so-called Fully Accessible Route, or FAR, which are free of any restrictions, will be large enough for a maximum 10% weight in the Government Bond Index - Emerging Markets Global Diversified that is followed by about $250 billion of assets under management, Luk wrote.

Indian authorities have been making efforts to get the nation’s bonds included in global indexes like JPMorgan Chase & Co. and FTSE Russell in hopes of attracting steady foreign inflows to fund infrastructure needs.