Why India's inclusion in Bloomberg Bond Index matters
Bloomberg Index Services (BISL) has announced that Indian bonds will join its Emerging Market (EM) Local Currency Index starting January 31, 2025. Nick Gendron, Global Head of Fixed Income Index Product at BISL, believes this move will "increase access to, and participation in, Indian markets." The integration will occur over 10 months, with Indian Fully Accessible Route (FAR) bonds' weight increasing by 10% of their full market value each month. Reserve Bank of India had introduced FAR in 2020.
Impact on foreign flows and Indian currency
The addition of Indian bonds to the Bloomberg EM index is likely to boost foreign investment in Indian sovereign bonds. Consequently, index funds following the Bloomberg Bond Index will adjust their portfolios to accommodate Indian sovereign bonds. This amounts to an estimated $10-15 billion directed toward Indian government's treasuries, as per IDFC First Bank. The increased foreign fund inflows are generally positive for the Indian currency since investors will need to exchange their local currency or dollars into rupees.
Access to global capital and cost of funds
Although India's bonds joining global indices may attract investors seeking portfolio diversification, they might not make global capital more accessible for corporate borrowers or lower borrowing costs. A ratings upgrade for India would be needed to benefit the companies because they would be seen as more credit-worthy. However, with Indian bonds joining Bloomberg EM index, the additional funds could result in a cap on government's treasury yields. That means yields won't increase if government borrowing or local credit demand rises.
Managing rupee appreciation
With anticipated foreign inflows of $30-45 billion over FY25, there could be concerns about rupee appreciation making imports costly and causing inflation. However, forex experts are of the opinion that this issue is manageable. The RBI has been regulating rupees in the range by purchasing or selling dollars in the open market, and any outflows by foreign investors due to the rise may be counterbalanced by the new fund inflows.
India's position in the Bloomberg EM local currency index
Once fully incorporated into Bloomberg EM index, India's FAR bonds will be capped at 10% weight within the index. The Indian Rupee is expected to become the third largest currency globally, after the Chinese Yuan and South Korean Won, within the Bloomberg Emerging Market Local Currency Index. As of January 31, 2024, there were 34 Indian FAR bonds with a market value of $448 billion eligible for inclusion in EM Local Currency Index and related indices.
What are government bonds?
Sovereign bonds are an instrument of debt security issued by the central bank to fund government expenditure. They are one of the safest assets to invest in as they are backed by the government and pay periodic interest payments.
