Mark Twain said, “A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain.”
I remembered this quote, when I saw, that JP Morgan had decided to include India in its Bond Indices. Why is that so? It was year 1999 when in a brain-storming session with RBI, it was proposed that Indian sovereign bonds should be included in JP Morgan bond indices. I remember the swift reaction of the JP Morgan representative, an empathetic no, which resonated in the entire boardroom.
Now, India’s foreign exchange reserves are 5000% higher than that in 1999. India’s exports are booming. With Make in India expected to produce positive impacts through its Production Linked Incentive government policy; coupled with electrification and planned de-fossilization of transport, India will have a consistent current account surplus from 2025. I expect annual current account surpluses to exceed $100 billion from 2026-27 while maintaining high domestic growth and low inflation. Of course, this presupposes continued economic prudence and continuity in policies framework.
Therefore, the addition to the JP Morgan Index is not going to create any strong economic tailwinds for India beyond 2025. It can potentially create a problem of plenty. In fact, the linking of the foreign flows MECHANICALLY to an Index produced by a foreign entity will significantly reduce the policy independence of RBI vis-à-vis G7 monetary policy, unless RBI is willing to implement MSS v2.0 and manage the variability of these flows as another unnecessary variable.
I have some concerns about potential concessions which may have been made on operational matters. It is important to note that a sovereign state is typically defined by three key elements:
- It issues bonds in its own currency.
- Its sovereign laws exclusively govern these bonds.
- The settlement of these bonds occurs entirely within its borders.
Tweaking the applicability of these elements may result in external interventions that can be perceived as a compromise to the state's sovereignty.
