India to remain on alert for 'hot money' after bond index inclusion

India will monitor flows of foreign funds after its inclusion into JPMorgan’s emerging market debt index and will take steps to avoid ‘hot money’ that can trigger volatility in its currency and bond markets, a senior government official said.

“We will keep monitoring it. And when necessary, steps will be taken,” T.V. Somanathan, a senior finance ministry official told Reuters in an interview.

The aim will be to “prevent volatility or volatile inflows” but “never” to restrict outflows, he said, adding that “all possibilities are open to keep volatility in check.

However, any talk about measures right now is “hypothetical”, said Somanathan. Last year, JPMorgan announced it would include some Indian bonds in the Government Bond Index-Emerging Markets and its index suite from June, which could lead to incremental inflows of around $23 billion.

Foreign investment in Indian government bonds jumped in the last three months when investors bought securities worth 446 billion Indian rupees ($5.37 billion). Somanathan said the government’s main concern with index investors was that some of these longer-term investors “come in passively and leave passively” and their exit does not always reflect the economic conditions on the ground.

Asked about the government’s borrowing, Somanathan said New Delhi was likely to raise nearly 200 billion rupees through sovereign green bonds in the 2024/25 fiscal year.” Within that total borrowing program, some component is likely to be green bonds. Likely to be around the same level as last year but a final decision has not been taken," he said.

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India issued sovereign green bonds for the first time in the previous financial year. Last week, the government unexpectedly lowered its gross borrowing target for the next financial year to 14.13 trillion rupees ($170.36 billion) and set a fiscal deficit aim of 5.1% of gross domestic product.

With inputs from Reuters.