The decision to include Indian government bonds in 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 to India. Analysts predict that these inclusions could lead to stable flows of around $25 billion to $30 billion over the next 12 to 18 months, with Goldman Sachs predicting inflows upwards of $40 billion during the scale-in period. JPMorgan has stated that the inclusion of Indian bonds will be staggered over 10 months, starting at 1% in June and reaching a maximum of 10% weightage in April of the following year.
The decision to include Indian bonds in global indexes has been described as a “milestone event” by Invest India, the government’s national investment promotion agency. The agency believes that the inclusion will help India achieve its goal of becoming a $5 trillion economy by 2030 and integrate more closely with the global economy. This move is expected to help India raise more funds, meet growing borrowing costs, and expand the investor base for government securities. The expansion of the investor base is also anticipated to lead to increased lending by Indian banks for infrastructure development and job creation.
While the inclusion of Indian bonds in global indexes does not necessarily make investing in India easier, it is expected to attract a broader set of investors to the country. The establishment of the fully accessible route (FAR) component of the government bond market, along with the growth of FAR securities as a proportion of the market, has made investing in Indian bond markets more accessible for foreign investors. This reform, combined with the index inclusion, is projected to bring in passive flows of around $30 billion.
India’s stock markets have experienced record highs, fueled by optimism, with the Nifty 50 index posting gains for the eighth consecutive year in 2023. Inflows into India’s domestic equity funds reached a 23-month high of $3.2 billion in February, while foreign inflows amounted to $2.2 billion in the week ending March 15. DBS senior economist Radhika Rao noted that local currency sovereign bonds are also expected to see gains from strong foreign inflows. By including Indian government bonds in global indexes, India is diversifying its funding sources, reducing pressure on domestic investors, lowering funding costs, aiding the fiscal position, eliminating the need for U.S. dollar sovereign debt issuance, and stimulating capital market development.
Overall, the inclusion of Indian bonds in prominent global indexes is seen as a positive move for India’s economy. The inflows generated by these inclusions are expected to provide stable funding for the country, help meet growing borrowing costs, expand the investor base for Indian government securities, and support infrastructure development and job creation. While the direct positive effects on India’s credit profile may be marginal in the near term, the long-term benefits of increased global investment in Indian bonds are likely to be significant. This development is anticipated to have a transformative impact on India’s financial markets and its position on the global economic stage.
