Indian bonds will be included in global indices. Is this a game changer?

Undated editorial illustration of Indian rupee and Indian flag.

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The recent decision to include Indian government bonds in two major global indexes is seen as a shot in the arm for the fast-growing country and is expected to bring in billions of dollars in inflows.

The Wall Street bank announced in September that Indian bonds would be included in the JPMorgan Emerging Markets Government Bond Index (GBI-EM) in June.

The inclusion of J.P. Morgan is According to reports, this is the first time that India has included on global bond indices.

Earlier this month, Bloomberg Index Services followed suit and announced that it would include Indian government bonds in its Emerging Markets Local Currency Government Index From January 31, 2025.

Analysts say such inclusion could lead to billions of dollars worth of inflows into India’s rupee-denominated government debt. As demand rises, bond yields fall, supporting the local currency.

Deepak Agrawal, chief investment officer of debt at Kotak Mutual Fund, told CNBC that he expects these inclusions to generate “steady flows of approximately $2.5 billion to $30 billion over the next 12 to 18 months following the rebalancing period that begins in June 2024.” ”.

“Overall, we think this is a step in the right direction,” Agrawal added.

Goldman Sachs said it expected inflows into the Indian bond market to “reach more than $40 billion from the time of the announcement to the end of the taper period, or about $2 billion per month.”

JPMorgan said the inclusion of Indian bonds will be staggered over 10 months, from 1% in June to a top weight of 10% in its index in April next year.

huge growth shock

JPMorgan Chase’s inclusion of Indian bonds hailed as a “milestone” by the industry Invest in Indiathe government’s national investment promotion agency.

“The inclusion of India will help India achieve its goal of an economic size of US$5 trillion by 2030,” the agency said, adding that it would help Asia’s third-largest economy integrate into the global economy.

It will also help India raise more funds to meet rising borrowing costs and expand the investor base for government securities.

“As a result of these stable long-term global investments, Indian banks, as the largest investors in government securities, will be able to provide more loans domestically, thereby creating infrastructure and creating jobs,” the Investment Authority of India said.

According to the Investment Authority of India, India’s sovereign bond market was valued at $1.2 trillion as of October and is dominated by domestic institutional investors.

Will this make investing in India easier?

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“Inclusion in the index itself does not make it easier to invest (in India),” Kenneth Akintewe, head of Asian sovereign debt at investment firm Abrdn, told CNBC.

But Akindwe said including Indian bonds in global indexes would encourage a wider range of investors to invest in the country and “frankly, given the strength of the market performance, they should do it anyway.”

“However, the reforms that led to index inclusion, namely the creation of the Fully Accessible Access (FAR) component of the government bond market, did make investing more challenging as the proportion of FAR securities in the market grew and those securities became index eligible. It’s easier.”

under Completely accessible routeEligible investors can invest their funds in selected government securities without any limit, paving the way for foreign investors to enter the Indian bond market.

Akintewe predicts that the increase in such indexes could bring about “$30 billion in passive flows.”

JPMorgan’s inclusion in bond indexes could boost passive inflows of about $24 billion between June 2024 and March 2025, Fitch Ratings said in a September report. “Flows could be larger if other indices also include Indian government securities,” the report added.

“This may help slightly lower funding costs and support further development of domestic capital markets, but the immediate positive impact on India’s credit profile will be minimal in the short term,” the ratings agency said.

Bonds and Stocks

promoter Indian stocks have hit record highs several times this year, driven by widespread optimism. Nifty 50 Index 2023 will mark the eighth consecutive year of growth.

Monthly inflows into domestic equity funds rose to $3.2 billion in February, a 23-month high, according to data from the Reserve Bank of India. Mutual Fund Association of IndiaGoldman Sachs said. Foreign capital inflows into India also reached $2.2 billion in the week ended March 15, according to the investment bank.

Local currency sovereign bonds are also expected to rise on strong foreign inflows, said Radhika Rao, senior economist at DBS Bank.

Until now, the biggest buyers of Indian government bonds have been institutional investors such as banks, mutual funds and insurance companies, but the inclusion of Indian government bonds in global indexes means the country will now be able to expand its fundraising pipeline.

Morgan Stanley Investment Management has been optimistic about India 'for a long time'

Abrdn’s Akintewe said: “It diversifies India’s funding sources, reduces pressure on domestic investors to absorb supply, lowers financing costs, improves fiscal position, removes the need to issue dollar sovereign debt and encourages capital markets to further develop.” .

—CNBC’s Clement Tan contributed to this article.