Government unwilling to modify tax code for inclusion in FTSE Russel Emerging Markets Bond Index

28 Sep 2022 , 11:39 AM

According to various news reports, India has ruled out any modifications to tax laws that would make it simpler for the country’s bonds to be included in international indexes.

According to the reports, the administration does not intend to exempt capital gains taxes and is worried that foreign investment will exacerbate the volatility of local markets. Those taxes have previously caused problems in discussions.

Investors are pouring money into Indian bonds on the assumption that the nation will replace Russian debt when FTSE Russell and JPMorgan Chase & Co. release the findings of their index reviews in the upcoming weeks.

Although discussions earlier broke down over the government’s insistence to preserve the authority to tax capital gains, analysts’ estimates of $30 billion in foreign inflows were dashed. Nevertheless, index compilers could continue to include the securities without adjustments.

The largest emerging market bond market that isn’t already represented in international indices is that of India. Since the middle of June, the benchmark 10-year bond yield for the country has decreased by almost 30 basis points as domestic banks and foreign investors increased their holdings. On Tuesday, the yield decreased seven basis points to 7.29%.

When making allocation decisions, money managers routinely monitor global bond indices, and inclusion frequently results in influxes of billions of dollars.

As the government still needs to address operational concerns, India’s bonds will probably only be included in JPMorgan’s index in the early part of next year, according to Reuters, which cited people with knowledge of the situation.

The rupee fell over 9% against the dollar this year and ended Tuesday’s trading session at 81.5762.

Investor anticipation regarding index inclusion had been boosted by India’s launch of the so-called Fully Accessible Route in 2020, which eliminated restrictions on foreign ownership of particular bonds.

Even if Indian bonds are included, the unwavering attitude on tax relief, which would permit settlement on a platform like Euroclear, may diminish their appeal.

According to a spokesperson, FTSE Russell will announce the findings of its review on Thursday. As of now, JPMorgan hasn’t provided a date for its announcement.

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