Morgan Stanley believes India could be included in the global bond indices which is likely to be a major positive for the Indian equities.
Investors have been staying away from the Indian bond market in the past few years given the widening fiscal deficit, above-target inflation and gradually weakening currency. This will likely change in 2022 once global bond indices include India, Morgan Stanley said.
The opening up of India’s sovereign bond market for greater foreign participation hints at the desire of policymakers to promote growth through investments.
This means India’s balance of payments would be pushed into a structural surplus zone, and external funding pressures on the currency would reduce. Indirectly it would also create an environment for a lower cost of capital and ultimately be growth-positive which is unilaterally positive for equities, according to the foreign brokerage firm.
The inclusion would trigger significant index-related inflows, followed by an allocation from active global bond investors, it added.
According to Morgan Stanley, the index inclusion will attract $170/250 billion in bond inflows in the next decade in its base/bull scenario.
Considering the positive impact of bond inflows on growth and interest rates, the brokerage firm believes equity market returns could be higher.
“Lower interest rates coupled with better confidence in growth/profitability is a great outcome for stock multiples. Overall, such a macro backdrop is good for equity prices, as it implies a lower cost of equity and stronger sustainable RoEs,” Morgan Stanley said.
The opening up of sovereign bond market would also benefit financial stocks including banking and non-banking by way of lower borrowing costs and better credit growth outlook.
Financial companies could witness improvement in profitability as well. As bond yields edge lower, financial companies may also see higher treasury gains, the foreign brokerage house said.
Private banks, particularly large ones, should be key beneficiaries, Morgan Stanley said.
Among non-bank financials, potential beneficiaries are likely to be Housing Development Finance Corporation, Bajaj Finance, SBI Cards and Payment Services, Mahindra Finance and Cholamandalam Finance, the brokerage firm said.
The structural implications for non-banking finance companies and housing finance companies could be favourable as foreign investor interest in corporate bonds, including NBFCs and HFCs, could be higher, the cost of borrowing could be low and they may get higher access to bond funding.