India seeks entry into JP Morgan, other market indices

The Indian government is in talks with JP Morgan and others to gain entry to benchmark indexes for emerging market debt in hopes of attracting billions of dollars in investment; and may ease some restrictions on foreign inflows in order to do so.

Finance minister P Chidambaram and other officials plan to meet next week in the United States with big fund managers that track such indices, including Pimco, Capital International and Standard Life, according to a Reuters report citing several unnamed sources.

To qualify for entry into the widely-followed JP Morgan Government Bond Index - Emerging Markets, India needs to ease rules on registration, documentation, and due diligence rules for the entry of foreign institutional investors (FIIs) in the Indian debt market, besides allowing them to invest more in government debt.

With a wide current account deficit and a weak rupee, India wants to attract some of the billions of dollars managed passively by tracking global indexes.

However, Indian restrictions limit foreign investment in onshore debt, which excludes it from indexes managed by JP Morgan and others, says the report.

India has been taking steps to ease investment rules but is also skittish about fully removing limits given worries about the volatility of global flows. Its credit rating also stands just one notch above junk status, although a downgrade would not disqualify it from an emerging market index.

In seeking index inclusion, India may modify rules to allow foreign institutions to invest more in government debt, now capped at $30 billion.

While India doesn't want to do away with caps entirely, it is considering further loosening rules that allow higher limits once investors reach 80 per cent of the cap, the report said.

One obstacle to index inclusion is India's withholding tax on foreign investment in government debt.

Earlier this year India reduced withholding tax of as much as 20 per cent on coupon payments to 5 per cent. India argues that the effective rate is zero for the majority of investors covered under bilateral tax treaties with countries such as the United States and Singapore.

India last month eased rules to allow foreign institutions to invest in government bonds on an "on tap" basis, or without first requiring the purchase of debt limits. It is also in the process of easing registration and due diligence rules for foreign investors to buy government debt, one of the Reuters sources said.