Month: September 2022

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India defers govt bond index inclusion to next year; $30 bln opportunity pushed back due to operational issues

India has deferred the planned inclusion of the government bonds in the JP Morgan emerging market global index to next year, as was being speculated on the street. The bond inclusion in the global index may have been pushed back to early 2023, as the Government of India still needs to address various operational issues, Reuters reported citing unidentified sources. Earlier, Goldman Sachs and Morgan Stanley had predicted the bond index inclusion would happen only in the 2nd or 3rd quarter of the next year. The Indian government began considering listing its securities for inclusion in global bond indices in 2013. However, restrictions on foreign investments in Indian debt meant that the country had to roll out a number of steps before its securities could be eligible.

Goldman Sachs said India bonds could be included in the index with a 10 percent weightage, the maximum for a country in the index, resulting in potential inflows of $30 billion from the move. Meanwhile, Barclays also said India could possibly be added to the Bloomberg Global Aggregate bond index.

If successful, India would be the last major emerging market to be added to the JP Morgan index, according to Reuters. Earlier this month, Morgan Stanley estimated that India’s inclusion could result in additional flows of as much as $30 billion within 10 months into the Indian government bond market. Last year, Morgan Stanley predicted that it could generate $170 billion to $250 billion of inflows over the next decade. “Most of JPMorgan’s index investors are in favor of including India in the index, but think issues such as investor verification and settlement rules need to be ironed out first,” Reuters reported citing three unidentified sources.

Bonds listed on global indices are settled through international platforms, including Euroclear, outside a country’s borders. It may be noted that Russia’s exclusion from the JPMorgan gauges came after it invaded Ukraine. In the Government Bond Index – Emerging Markets Global Diversified, or GBI-EM index, Russia had a weight of about 8 percent before it was removed, and now there are seven countries with a weight of 10 percent each and 13 countries sharing the remaining 30 percent, according to the Morgan Stanley note.

Earlier this month, Bloomberg noted that India was ‘on track to be placed on index watch for inclusion in JPMorgan’s bond index.

Eqwires Research Analyst

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WAPCOS files IPO papers with Sebi; government to divest stake

Public sector firm WAPCOS Ltd has filed preliminary papers with capital markets regulator Sebi to float an Initial Public Offering. The public issue will be a complete Offer For Sale (OFS) of up to 32,500,000 equity shares by the promoter, the Government of India, according to the Draft Red Herring Prospectus (DRHP).

WAPCOS provides consultancy, and engineering, procurement, and construction services in the field of water, power, and infrastructure sectors. It comes under the Ministry of Jal Shakti. The company also provides its services abroad, particularly in South Asia and across Africa in the fields of dam and reservoir engineering, irrigation, and flood control.

It has ongoing projects in 30 countries and has been associated with over 455 overseas projects, both completed and ongoing, as per DRHP. The company’s revenue from operations increased 11.35 percent to Rs 2,798 crore in the financial year 2022 while profit after tax rose 14.47 percent to Rs 69.16 crore during the same period.

Some of the listed peers in the segment are Ircon International, Rites, Engineers India, NBCC, and Va Tech Wabag. As on March 2022, the company’s order book stood at Rs 2,533.93 crore and Rs 18,497.33 crore for construction contracts. So far in the current fiscal, the Centre has collected Rs 20,557 crore by way of divestment proceeds through the Life Insurance Corporation of India IPO and Rs 3,000 crore from minority stake sale in ONGC.

The government has pegged the divestment targets at Rs 65,000 crore for the current financial year. IDBI Capital Markets & Securities Ltd and SMC Capitals Ltd are the book-running lead managers for the issue. The equity shares are proposed to be listed on BSE and NSE

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RBI intervening in the forex market to cushion Rupee fall; spends $82.8 bn from forex reserves in 9 months

The Fed raised the interest rates by another 75bps yesterday, as expected. This is the third back-to-back 75bps rate hike this year by the US central bank. With the latest hike, the Fed fund rate (FFR) now stands in the range of 3.0%-3.25% and is the highest since January 2008. The FOMC revised the median FFR at the end of 2022 up by 100bps to 4.4% from 3.4% in June, indicating a cumulative rate hike between 125bps over the next 2 FOMC meetings this year. For 2023, the median FFR is revised up 4.6% vs. 3.8% in June, suggesting no rate cuts in 2023 and maintaining the terminal rate of 4.6% till 2024.

These projections are much more aggressive than what investors had been pricing earlier. The dot plot projections are suggesting that the Fed will ‘keep at it’ till it can see inflation coming down under its target range. The Fed also made it clear that it is ready to sacrifice growth and is increasing the view that the demand and labor market need to cool off to get the runway inflation under control. The Fed chairman, Jerome Powell repeatedly used the words ‘restrictive interest rates for a longer period’ to emphasize that the central bank’s main goal is to tame inflation that is running hot at 4-decade high levels.

What does it mean for the Indian economy?

A more aggressive tone by the Fed doesn’t spell good news for emerging market currencies including INR. Post yesterday’s FOMC meeting, the DXY index zoomed to 111.78, the highest in 20 years. The INR once again crossed the psychological value of 80 against the dollar, touching a new all-time low of 80.68. The RBI has been continuously intervening in the forex market to cushion the fall in rupee value. This intervention is depleting India’s foreign currency reserves at an accelerated pace. The RBI has already spent $82.8 billion from its forex reserves in 2022 so far, with the reserves currently standing at $550.8 billion as of 9th September 2022 against $642.4 billion last year. The reserves are now equivalent to covering about nine months of import compared to 16 months a year ago.

With the reserves depleting in the past, the RBI will now be more prudent in the extent of its intervention to support the rupee. Going forward, the RBI might let the rupee weaken due to a widening trade balance, elevated global commodity prices, and stretched valuations of INR compared to other Asian currencies. In addition, higher interest rates in major economies globally will put pressure on the RBI to go for a higher rate hike and stay at higher rates for a longer period, which might slow down the domestic economic growth. As Powell said in his press meeting – “There is no painless way to tame inflation”. It might just be the start of the pain.

Eqwires Research Analyst

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