Global index provider FTSE Russell will defer India's inclusion in its government bond index due to taxation, registration and settlement issues, even as two other major index providers have announced their inclusions, it said on Thursday.
However, it acknowledged progress in the accessibility of the securities in its March review for the FTSE Emerging Markets Government Bond Index (EMGBI), adding that the bonds will remain on its watch list.
It said India had made progress with additional flexibility afforded to custodians relating to margin financing, which has now been more widely adopted and has helped improving certain aspects of the trade settlement process.
Still, factors like "documentary requirements to fulfil foreign portfolio investor registration, increased regulatory reporting, the inflexible length of the settlement cycle and the tax clearance process" are hindering the bonds' qualification for "Market Accessibility Level of 1", FTSE said.
The index provider said it will continue dialogue with the Reserve Bank of India and seek feedback from a cohort of international investors entering the bond market on the practicalities of their investment experience.
The development comes after JPMorgan and Bloomberg Index Services announced inclusion of some Indian government securities in their emerging market indices from June 2024 and January 2025 respectively.
Indian bonds have seen foreign inflows of nearly $10 billion over the last six months.
Joining the FTSE index was expected to further increase investments by index-linked funds, although market participants did not see such a move happening immediately.
Analysts have estimated India's inclusion in the JPMorgan index will bring in around $23 billion, while the Bloomberg index is expected to attract $3 billion of inflows from index-linked investors.
"FTSE has a more stringent criteria, and the quantum of inflows is also not very large, hence market will not react to this, especially at a time when there are a host of other positive triggers," said VRC Reddy, treasury head at Karur Vysya Bank.
India has been on the watch list since March 2021, while FTSE deferred the inclusion in its September review, saying areas of improvement highlighted by foreign investors were largely unchanged.
(This story has been refiled to say inclusion 'in index', not 'from index,' in the headline)
