"Normally to include a sovereign bond into global indices, the bond issuing country has to remove all foreign investment caps. But Indian government will open a new category of bonds with no caps instead of removing the 6 per cent cap for the entire market," Sanyal said.
Since the weightage in bond indices in global market is not to the country but to the markets, this means the country doesn't have to be opened up but only the bonds have to be opened.
"The government in the Budget has announced that it would issue special series bonds in rupees. So we will be creating these sovereign rupee bonds which can be bought and sold by foreigners freely. This will make these G-secs eligible for many of the bond indices," Sanyal told IANS in an interview.
India will not be able to open up its bond market fully without any caps as that can lead to inflow of lots of 'Hot Money' or volatility, he said.
The advisor said global indices give access to major pool of funds and some of them have funds worth $2 to $3 trillion which are currently not accessed by the Indian corporates or government.
The timing, tenor and quantum of the soverign bons will be decided by Department of Economic Affairs, he said.
The Budget 2020 made a case for opening up of specific government bond limits freely for Non-Resident Investors-this is seen as a step in the right direction aimed at carving out a roadmap for India's inclusion in the EM bond index.
"Its time we are included in the these bond indices. These bond indices require full freedom for the indices to buy and sell the bonds when they need.
"In India full freedom or removal of absolute capital control is not allowed to avoid too much volatility or inflow of hot mooney. So unless Indian bond market completely opens up, getting entry into these indices looked difficult", he pointed adding the Budget has taken a well thoughtout decision.
Sanyal further said the Indian bond market is poised for radical changes and the Bilateral netting laws once in place will help India create a credit default swap (CDS) market which critical for a corporate bond debt market to give the Indian companies a new source of funds and also the inclusion of Special Indian government bonds in global bond indices will make exchquer raise money from such huge pool of funds, the principal economic advisor said.
Budget 2020 has introduced some of the important proposals on bonds that will radically change the way the Indian bond market functios. Like the bilateral netting Bill which will net off the exposures. This is a mjor change in capitalisation requirement, radically different from the way it current operates
He said CDS market is an absolute necessity for a adding depth to a corporate debt market. Currently the debt papers are issued for various tenors and all of these are not fungible with each other. On top of it, in India most corporate are not issuing enough debt to have a liquid market.
The liquid CDS market is a global advanced market phenomena. The creation of the CDS market is a necessity today. So we are looking forward to bilateral netting laws and so that the CDS market takes off in India. This then will let Indian industry completely access a new source of funds which it does not have today.
In addition to this, the government plans to increase investment limit of foreign portfolio investors (FPI) in corporate bonds from 9 per cent to 15 per cent. Experts said this would mean incremental, about Rs 2.11 trillion of Corporate Bond FPI limits.
Finance Minister Nirmala Sithraman announced plans to fully open a certain category of bonds for foreign investors during her budget speech on February 1, but did not give details such as quantity, timing or tenure.(Anjana Das can be contacted at firstname.lastname@example.org)