The recent decision to add Indian government bonds to two major global indexes, the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) and Bloomberg Index Services’ Emerging Market Local Currency Government Index, is expected to bring in billions of dollars in inflows. Analysts anticipate that this move could lead to a stable flow of around $25 to $30 billion over the next 12 to 18 months. The inclusion of Indian bonds in these indexes is seen as a positive development that will boost growth in India’s bond markets and support the local currency.
JPMorgan’s decision to include Indian bonds has been praised as a “milestone event” by Invest India, the national investment promotion agency of the Indian government. The inclusion is expected to help India achieve its goal of becoming a $5 trillion economy by 2030 and integrate more closely with the global economy. This move is seen as a way to raise more funds, meet growing borrowing needs, and expand the investor base for government securities. The value of India’s sovereign bond market was estimated at $1.2 trillion as of October and is primarily dominated by domestic institutional investors.
While the inclusion of Indian bonds in global indexes does not necessarily make investing in India easier, it does encourage a broader set of investors to consider opportunities in the country. The reforms that have led to index inclusion, particularly the establishment of the fully accessible route (FAR) in the government bond market, have made investing easier. Under the FAR, eligible investors can invest in specified government securities without ceiling limits, opening up access to the Indian bond markets for foreign investors. This could potentially bring in a passive flow of around $30 billion.
India’s stock markets have experienced significant gains fueled by optimism, with record highs being reached multiple times this year. Inflows into India’s domestic equity funds and foreign investments have been on the rise, indicating strong market performance. Despite the positive outlook for stocks, local currency sovereign bonds are also expected to see gains due to strong foreign inflows. The inclusion of Indian government bonds in global indexes provides the country with additional sources of funding, reduces pressure on domestic investors, lowers funding costs, and supports capital market development.
The decision to add Indian bonds to global indexes is expected to have a positive impact on India’s credit profile and funding costs. Fitch Ratings estimates that JP Morgan’s inclusion of Indian bonds in its index could lead to passive inflows of about $24 billion between June 2024 and March 2025. While the effects on India’s credit profile may be marginal in the near term, the move is likely to lower funding costs slightly and support the further development of domestic capital markets. The expansion of funding sources through global indexes allows India to diversify its sources of financing and potentially reduce the need to issue US dollar sovereign debt.
Overall, the inclusion of Indian government bonds in global indexes is viewed as a significant step forward for India’s bond markets and the country’s economy as a whole. This move is expected to attract billions of dollars in inflows, increase the investor base, and support growth in both the bond markets and the local currency. By expanding funding avenues and driving funding costs lower, the inclusion in global indexes is likely to have lasting positive effects on India’s financial landscape and development.
