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Website |
The Economic Times - Mumbai |
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Date |
2 March 2024 |
India's engagement with global rating agencies hasn't
produced desired results. Its sovereign credit is rated a notch above
speculative grade, despite having more forex reserves than net forex debt
(excluding NRI deposits, which get rolled over).
For decades, global loan and bond markets have priced
India's risk way below our assigned ratings. Some Western economies with a
predictable default record have enjoyed higher ratings than India in the past.
Our track record of servicing global obligations hasn't been found adequate. We
have never been able to convince rating agencies to give up moody and poor
standards. We failed to capitalise when data was breached by a rating agency.
It got away with a slap on the wrist.
Yet, India has done a remarkable job engaging with agencies
that manage global bond and equity indices. These agencies influence investors
across the globe. Their indices are replicated by passive fund managers,
managing trillions of dollars worldwide. Every active manager tries to beat the
indices created by these agencies.
Bond agencies have included India in the benchmark indices
on our terms. A fully accessible route for gilts was a brilliant solution to
meet agencies' requirements and keep our controls. We also didn't yield on the
settlement, or tax concessions. The penalty goal of Russia's exit from EM bond
indices after the Ukraine war was converted to a fine goal by getting India
included in EM bond indices on fair terms. This will likely bring $12-15
billion active flows and $25-28 billion passive flows in our debt market
between mid-2023 and 2025. It will also set a precedent for inclusion in other
bond indices.
Engagement details on equity indices are equally
fascinating. There was a time when China (ex-Hong Kong and Taiwan) had little
under one-third of the EM Index weight, and was working to increase it to more
than half of the index. There were usual Chinese above- and below-ground
activities to engage index agencies. India's weight was about 1/12th in EM
index.
An increase in China's weight would come at the cost of
other countries, including India, and could have resulted in billions of
dollars of outflows.
A series of actions, from active engagement with agencies
to investors, were taken to counterbalance China's move. The pinnacle of this
engagement was when the US vice- president tweeted why American savings were
being sent to China. Threat of reducing India's weight during the SGX Nifty
saga was carefully tackled through a partnership with GIFT City. Do remember
this tackling was against agencies, who had looked the other way when China
banned selling on a downtick and stopped FPI investors from repatriating sell
proceeds or selling in companies where they had more than 1% stake.
Agencies also chose to ignore corporate governance blunders
in China. India took positive steps, too, such as aligning sectoral caps in
PSUs to increase free float and index weights.
The result was spectacular: India's weight went up from
8.2% in February 2018 to 18.2% today. China's weight dropped from 30.3% to
25.4%. A lot of this is the function of how Indian markets outperformed China.
Fund flow acts as a catalyst for market performance. Active engagement with
index agencies protected FPI funds invested in India and ensured higher
allocation from future FPI flows to our markets.
The journey isn't over yet. We must engage in upgrading
South Korea from an EM to DM in the index, and ensure HDFC Bank is included in
the index at a full weight, rather than a discounted weight. Kudos to finmin,
Sebi, exchanges and other regulatory bodies who ensured India got the weight it
deserved. Let's hope that one day, we'll get what we should've got long back
from rating agencies.
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