Rupee Bond

Indian government bonds have only very recently been opened to foreign investors, under the Modi government’s liberalisation programmes. Previously there were limits on how much rupee denominated government bonds non-residents could buy.  

Bonds need at least 2.5 years to maturity to be eligible. They must be fixed rate and neither callable nor convertible. They also must be included under FAR. Only one quarter of India’s $1 trillion bond market is under FAR. 

The fund charges 0.38%.  

Bernie’s commentary – currency depreciation, copycats, liquidity  

LGIM was the European pioneer here, launching the L&G India INR Government Bond UCITS ETF (TIGR) on the London Stock Exchange in October. The fund holds $310 million, which is a pretty good run for a bond ETF less than one year old. Today’s launch is a copycat of TIGR for sure (we all know how it works, right?) XIGB tracks the same index as TIGR, while charging just one basis point less.  

For anyone considering buying rupee bonds, keep the following points in mind: 

1. India currency forwards are illiquid, so currency hedging the rupee is expensive. Yet India’s currency has been declining against the USD for 20 years. There’s no clear path to capital stability here.  
2. Indian bonds have been in a supply glut, driving yields above 7%. The credit rating of the Indian government is BBB.  
3. Indian government bonds are nowhere near as liquid as US treasuries. Transaction costs on the underlying can eat away at yields. However market cap weighting, and only taking in bonds with 2.5 years maturity remaining, should mitigate this.  
4. Indian bonds are scheduled for inclusion in famous bond indexes soon. So if you’re thinking of this as a completion piece, maybe think again.

General updates: 

• S&P Global is conducting a review of its timber, water and agribusiness indexes after they’ve hit capacity constraints. As ETFs tracking these indexes have gotten bigger, they’ve started impacting the underlying market, prompting the review. S&P was in the news a couple of years ago as its clean energy index tracked by iShares ICLN began distorting New Zealand’s share market after strong inflows.