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

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

Indian bonds will be added to the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) in June, the Wall Street lender announced in September.

JPMorgan’s inclusion is reportedly India’s first inclusion in a global bond index.

Earlier this month, Bloomberg Index Services followed suit, announcing that it will add Indian government bonds to its local currency government index of emerging markets starting January 31, 2025.

Such inclusions, analysts noted, could lead to billions of dollars inflows into Indian rupee-denominated government debt. As demand increases, bond yields fall, supporting the local currency.

Deepak Agrawal, head of debt investments at Kotak Mutual Fund, told CNBC that he expects the inclusions to generate “stable flows of around $25.” [billion] to $30 billion” over the next 12-18 months after the rebalancing period starting in June 2024.

“Overall we see this as a step in the right direction,” Agrawal added.

Goldman Sachs said it expects Indian bond markets to see inflows of “more than $40 billion from the time of the announcement to the end of the expansion period, or approximately $2 billion per month.”

JPMorgan said the inclusion of Indian bonds will be staggered over 10 months, starting with a 1% weighting in June up to a maximum 10% weighting in its index in April next year.

JPMorgan’s inclusion of Indian bonds was hailed as a “landmark event” by Invest India, the government’s national investment promotion agency.

“Inclusion will help India realize its goal of a $5 trillion economy by 2030,” the agency said, adding that it will help Asia’s third-largest economy integrate with the global economy.

It will also help India raise more funds, meet rising borrowing costs and broaden the investor base for government bonds.

“As a result of these long-term stable global investments, Indian banks, the largest investors in government bonds, will be able to lend more domestically, leading to infrastructure building and job creation,” he said. established Invest India.

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

“The inclusion of the index itself does not allow you to invest [in India] easier,” Kenneth Akintewe, head of Asian sovereign debt at investment firm Abrdn, told CNBC.

But Akintewe said the addition of Indian bonds to global indexes encourages a much larger group of investors to invest in the country, “which frankly they should have done anyway, given the strong market performance.”

“However, the reforms that led to inclusion in the index, namely the establishment of the fully accessible (FAR) component of the government bond market, with FAR bonds growing in proportion to the market and these bonds eligible for index, make investing easier. .”

Under the fully accessible route, eligible investors can invest money in specific government bonds without maximum limits, paving the way for foreign investors to access Indian bond markets.

Akintewe predicted that additions to such indices could lead to approximately a “passive flow of $30 billion.”

Inclusion in JP Morgan’s bond index could facilitate around $24 billion in passive inflows between June 2024 and March 2025, Fitch Ratings said in a September note. “Flows could be higher if other indices also shift to include Indian government bonds,” the note added.

“This may serve to slightly reduce financing costs and support the further development of domestic capital markets, but the direct positive effects on India’s credit profile will be marginal in the near term,” the ratings agency said.

Fueled by broad optimism, Indian stock markets have hit record highs several times this year Nifty 50 Index recording its eighth consecutive year of earnings in 2023.

Monthly inflows into India’s domestic equity funds rose to a 23-month high of $3.2 billion in February, based on data from the Association of Mutual Funds in India, Goldman Sachs said. India also recorded foreign inflows of $2.2 billion in the week ended March 15, according to the investment bank.

Radhika Rao, senior economist at DBS, said local currency sovereign bonds were also poised to gain on strong foreign inflows.

The biggest buyers of India’s government debt have so far been institutional investors such as banks, mutual funds and insurance companies, but including Indian government bonds in global indexes means the country will now be able to expand its fundraising avenues.

“It diversifies India’s sources of financing, relieves pressure on domestic investors to absorb supply, reduces financing costs, helping India’s fiscal position, eliminates the need to issue sovereign debt in US dollars, and encourages further development of the capital market,” Abrdn’s Akintewe said. .

— CNBC’s Clement Tan contributed to this story.