India Bonds Will Now Be In More Institutional Portfolios; Are They In Yours?

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.


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.


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.


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