Indian bond index: mighty dollar must sometimes play by local rules

JPMorgan will not add India’s $1tn local government bond market to its influential benchmark index just yet. Apparently, there were doubts about the ability of local financial plumbing to handle inflows.

That chimes with perceptions of an Indian paradox: a country where clumsy bureaucracy and creaky infrastructure goes hand-in-hand with tech-savvy enterprise.

There is another interpretation of the continuing exclusion of the world’s second-largest nation from the GBI-EM Global Diversified benchmark. A market can be open to foreign capital without rejigging rules simply to suit US fund managers.

JPMorgan has had India on “positive index watch” since October 2021. A green light was expected this month. Instead, India will stay on “index watch”. Discussions with regulators continue.

Foreign investors complained about the time taken to register local accounts. They doubted the ability of local entities to handle clearing, settlement and custody.

This is surprising in a country with sophisticated technology and pharmaceuticals industries. Indeed, local investors say the bond market is transparent and efficient. The issue is structural as much as technological.

Trades must be settled on the day they are opened. This can be tricky from distant time zones. Foreign investors would like trades to be handled by a familiar system such as Euroclear, which would smooth over difficulties.

But India sees no reason to change its rules. It wants foreign investment in its bond market on its own terms.

For the moment, the argument is largely academic. Money has been flooding out of emerging markets all year. It is no surprise that foreign investors are disinclined to jump through Indian hoops just now.

But when the surge in the US dollar ends, investors may think again. The capability to invest in India bonds, notably sovereign ones, might then bring competitive advantage as well as headaches.

India is right to hold its ground. There is no doubting the supremacy of the dollar. But international trade requires adaptation on both sides of a deal.