India Bonds Enter Institutional Portfolios—What It Means for You
The good news for India’s bond market regarding wider acceptance continues.
After India’s inclusion in the JP Morgan Government Bond Index in October 2023, Bloomberg said it will include India’s bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices from January 2025.
Over 10 months, the inclusion into the Bloomberg Emerging Market 10% Country Capped Index will see India hitting the maximum 10% cap, positioning it alongside China and South Korea as one of the capped markets.
In the market cap-weighted variant of the index, India is poised to become the third largest country, trailing only behind China and South Korea, according to a Bloomberg statement.
The index will have 34 Indian securities, accounting for 7.26% of the index's total market value, which stands at $6.18 trillion.
Let us understand the likely impact on foreign investment flows, the Indian economy, and individual investment portfolios.
What’s Driving Institutional Interest in Indian Bonds?
Inclusion in Global Bond Indexes
India’s addition to JPMorgan’s Government Bond Index–Emerging Markets and Bloomberg’s EM Local Currency Government Index is a major catalyst. Staggered inclusion brings steady, rules-based buying from index-tracking funds, with active managers positioning ahead of passive flows. The result is a deeper demand for G-Secs, which improves liquidity and potentially lowers borrowing costs over time.
For portfolios, benchmark inclusion also enhances research coverage and transparency, making Indian bonds more comparable to their global peers.
India’s Macroeconomic Strength
Institutions value clarity. Growth remains resilient, inflation has shown signs of stabilising, and the RBI has held the repo rate at 6.50 per cent. 10-Year G-Sec yields around the 7 per cent mark provide a meaningful pickup over many developed markets. Combined with prudent fiscal management and steady GST collections, this backdrop supports a constructive view on duration and high-quality carry, while helping global allocators diversify away from concentrated exposures.
GIFT City and Regulatory Reforms
Policy steps are widening market access. GIFT City’s IFSC ecosystem offers clearer tax treatment for eligible entities, efficient clearing and settlement, and a growing base of global participants. Reforms such as the Fully Accessible Route for selected G-Secs, SEBI’s oversight of online bond platforms, and ongoing upgrades to market infrastructure are reducing frictions. Together, these changes create a more investable, scalable, and transparent market for institutions.
What Institutional Inflows Mean for the Bond Market?
Increased Liquidity and Market Depth
A surge in institutional participation translates directly to higher liquidity. With more active buying and selling, price discovery improves, and bid-ask spreads narrow, allowing investors to enter and exit positions efficiently. This trend is especially evident in the secondary market, where turnover is increasing and a broader range of instruments is actively traded. Enhanced liquidity also encourages more corporate issuers to tap bond markets for their long-term funding needs.
Yield Compression and Rate Stabilisation
Institutional inflows often drive yield compression, as strong demand raises bond prices and reduces yields, especially on high-quality instruments. This process can lead to a more stable interest rate environment, lowering funding costs for issuers and smoothing market volatility. Over time, a maturing market with stable rates enables long-term capital planning and unlocks refinancing opportunities for corporates with stronger balance sheets.
Greater Global Confidence in Indian Debt
Robust inflows from well-recognised asset managers, pension funds, and sovereign wealth funds reflect growing global confidence in Indian debt. Inclusion in international bond indexes not only attracts steady passive investments but also sharpens research coverage and institutional scrutiny, elevating transparency and governance standards. As India’s bond market integrates with global capital pools, the credibility of Indian debt continues to rise, broadening access and supporting currency strength.
Catalyst for More Foreign Investment
The inclusion of Indian government bonds into the Bloomberg Emerging Market Local Currency Index signifies a pivotal shift towards increased foreign capital infusion into India's bond market. Predominantly, index funds—known for their passive investment approach—will adjust their portfolios to incorporate Indian sovereign bonds, aligning with their proportional representation in the index.
Projected Capital Inflows
The global assets under management by index funds tracking the Bloomberg Bond Index are approximately $3 trillion.
India's expected index weight of 0.6-0.8 per cent translates into an anticipated $10-15 billion investment in Indian treasuries, supplemented by potential investments from actively managed funds.
While benchmarked against an index, these funds often adjust their holdings based on market outlooks, potentially increasing the inflow of foreign capital
Broadening Access to Global Capital
The bond inclusion marks a milestone, potentially enhancing the attractiveness of Indian bonds to global investors.
This development might not directly ease global capital access or lower funding costs immediately, but it positions India favourably in the international market.
In perspective, Adani Green Energy priced a $409 million 18-year bond after receiving a demand of nearly $3 billion, according to media reports.
The icing on the cake will be an upgrade in India's credit rating, which will bolster India’s appeal to global investors.
Currency Implications
The influx of foreign investment is generally a boon for the national currency. In this scenario, the demand for the Indian rupee is expected to climb as foreign investors convert their funds to participate in India's bond market.
With an influx estimated between $30 billion and $45 billion, thanks to the inclusions in both Bloomberg's and JPMorgan's indices, the rupee could appreciate against the dollar.
Yet, this challenge is within the manageable spectrum for India's central bank, which has adeptly navigated currency fluctuations in the past.
How to Participate in Indian Bonds as a Retail Investor?
Direct G-Sec Access via RBI Retail Direct
Open a free Retail Direct Gilt (RDG) account on the RBI portal. You can buy Government of India bonds, State Development Loans, and Treasury Bills in primary auctions or the secondary market. Payments and interest are deposited directly into your bank account, and holdings are maintained in your RDG account. This route suits investors who want sovereign exposure, clear documentation, and no intermediary broking account.
Bond Mutual Funds and ETFs
If you prefer a simpler route, consider debt mutual funds and bond ETFs. These give diversification and professional management. Categories include gilt funds, corporate bond funds, and target maturity funds that hold a defined portfolio till a stated year. NAVs can move up or down with interest rates and credit events, so match the fund’s duration and credit profile with your goal horizon and risk limits. Check expense ratios and exit loads.
Embracing Indian Bonds
Incorporating Indian government bonds into your investment portfolio offers a dual advantage: diversification and access to the demand trajectory created for the bonds by foreign investors.
For investors seeking alternatives to traditional markets or aiming to capitalise on emerging market dynamics, Indian sovereign bonds present an attractive proposition.
India’s robust economic growth is evident in the collection of GST, which rose nearly 13 per cent in February to a three-month high pace of over Rs 1.68 lakh crore, marking the fourth-highest monthly collections from the tax.
Robust tax collections coupled with a tight rein on fiscal deficit, even in an election year, augur well for bonds, say experts.
The inclusion of Indian bonds in the Bloomberg Bond Index reflects India's growing stature in the global financial ecosystem and opens up new avenues for investors to diversify and enrich their portfolios.
As we approach this new era, the smart investor must look to tap the opportunities presented by the Indian bond market.
Frequently Asked Questions
1. Why are Indian bonds being added to global indexes now?
Index providers look for stable rules, market access, and consistent data. India has improved on all three with clearer foreign access to G-Secs, deeper secondary market trading, and steady macro signals. Inclusion in major EM bond indexes formalises that progress and allows passive funds to buy according to set rules. It also encourages active managers to study India more closely and allocate based on fundamentals.
2. Will this impact bond yields in India?
Stronger foreign demand can lift prices and nudge yields lower over time. The effect is usually gradual because index inclusion is phased, and domestic factors still matter. Global rates, crude prices, and RBI actions can create swings. The net impact tends to be tighter bid-ask spreads, better liquidity, and a more stable curve. Investors should still match their duration to their goals, rather than trying to predict short-term market moves.
3. Is this a good time for retail investors to invest in bonds?
It can be, if the choice fits your goals and horizon. Focus on suitability. Use simple rules, such as laddering maturities and maintaining higher-quality core holdings. Consider target maturity funds for date-based needs and direct government securities (G-Secs) for exposure to the sovereign. Avoid timing calls. Decide based on cash flow needs, tax situation, and risk capacity. Review annually and keep documents handy.
4. What types of bonds should I consider?
Begin with Government of India bonds and State Development Loans for exposure to the sovereign sector. Add high-quality corporate bonds or NCDs for incremental yield, after checking rating, covenants, and liquidity. Target maturity funds and bond ETFs provide diversification with defined maturities. If you value sustainability, explore eligible green bonds. Maintain a core of higher-quality assets and diversify across issuers and maturities to effectively manage risk.