What is the news?
Shares of public sector banks (PSUs) rallied on Monday, outperforming the broader market and the private banking sector, on the back of reports that Indian government bonds are likely to be included in global bond indices soon. This could boost the demand for Indian debt and lower the borrowing costs for the government and PSUs.
The Nifty PSU Bank index, which tracks the performance of 12 state-owned lenders, jumped 3.4% on Monday, while the Nifty Bank index and the Nifty Private Bank index fell 0.54% and 0.67%, respectively. The benchmark Nifty 50 index also closed the session in the red, down 0.29% from Friday’s close, ending its 11-day winning streak.
Why is this important?
The inclusion of Indian government bonds in global bond indices, such as the FTSE World Government Bond Index (WGBI) or the Bloomberg Barclays Global Aggregate Index, could attract billions of dollars of foreign inflows into the Indian debt market. According to some estimates, India could receive up to $40 billion of passive inflows from global index funds if it joins the WGBI.
This would increase the liquidity and stability of the Indian bond market, and lower the yields and spreads of government and PSU bonds. This would benefit the PSUs, which are major borrowers of funds from the market, as they would be able to raise capital at lower costs and improve their profitability.
Which PSU banks gained the most?
Among the PSU banks, Indian Overseas Bank (IOB) was the top gainer on Monday, surging 17.47% to Rs 46.4 per share. The bank reported a net profit of Rs 327 crore for the quarter ended June 2021, compared to a net loss of Rs 1,196 crore in the same period last year.
Other PSU banks that gained more than 5% on Monday were Bank of Maharashtra (up 9.09%), Central Bank of India (up 7.69%), Punjab & Sind Bank (up 7.14%), Bank of India (up 6.25%), and Canara Bank (up 5.57%).
What are the challenges and risks?
While the inclusion of Indian government bonds in global bond indices is a positive development for the Indian debt market and the PSU banks, it also comes with some challenges and risks. For one, India would have to meet certain criteria and standards to be eligible for inclusion, such as market accessibility, liquidity, transparency, and regulatory framework.
Moreover, India would have to maintain a stable macroeconomic environment and fiscal discipline to retain its attractiveness for foreign investors. Any adverse shocks or policy changes could trigger capital outflows and volatility in the bond market, which could hurt the PSUs and other borrowers.
What are the expectations and outlook?
The expectations of India’s inclusion in global bond indices have been building up for some time, as the government and the Reserve Bank of India (RBI) have taken several steps to reform and deepen the bond market. These include allowing full foreign ownership of certain government bonds, easing foreign exchange rules, launching a new benchmark 10-year bond, and introducing an electronic trading platform for retail investors.
According to some reports, India could be included in the WGBI as early as October this year, subject to a formal announcement by FTSE Russell, the index provider. This could be a game-changer for the Indian bond market and the PSU banks, as they would benefit from increased foreign participation and lower borrowing costs.
