After JP Morgan, Indian bonds set to enter other global bond indices; capital raising for infra push to get a boost

• Indian government bonds could enter other global indices like the Bloomberg Global Aggregate Index and FTSE, attracting capital flows of another $27 bn.
• Yields on India’s 10-year bond to decline below 7% levels once the inclusion begins from next year. Since the bonds that will be included in these indices will be rupee denominated, the currency risks are minimal for foreign investors.
• India could notify additional bond series for long-term debt capital to fund infrastructure and development needs.

The inclusion of select Indian government securities into JP Morgan’s emerging market indices is a big deal. Not just because it will lead to capital flows of at least $23 bn over the 10-month period after the inclusion begins in June 2024, but because very soon other global indices like the Bloomberg Global Aggregate Index and FTSE will also follow suit, which could lead to capital flows of another $27 bn.

Over time, India’s government securities could also enter the global aggregate series, JADE series and JSEG GBI-EM index series of JP Morgan indices. Over the next one year, foreign investors are expected to invest $40-50 bn in government securities issued by the Government of India.

The inclusion of Indian bonds into the global indices will not just boost India’s profile but will also “strengthen local fundamentals,” say debt market experts. With this inclusion, bond yields on government securities will decline, making it possible for India to raise debt capital at affordable rates. According to Axis Mutual Fund, India could also notify additional bond series for long-term debt capital to fund India’s infrastructure and development needs. The money that will come into these bonds will be through passive funds that track these indices and, therefore, long-term in nature. These incremental flows into government securities will diversify the investor base of government bonds and will also help balance of payments.

This is material so far foreign investors have not been very bullish on Indian bonds also because emerging market bonds carry currency and other macroeconomic risks on them because of the current account deficit that many such countries run.

The currency risk that these bonds carry is a big deterrent for global investors. Since the bonds that will be included in these indices will be rupee denominated, the currency risks are minimal for foreign investors. Axis Mutual Fund’s debt experts say: “The RBI could conduct sterilization operations during this inclusion period buffeting forex reserves and the currency.”

The development will also have a positive impact on bond yields in the medium term. While the US Treasury yields have peaked and investors can now park their money in these risk-free securities at 4.5% in recent times, bond market experts expect Fixed income strategists expect India’s 10-year government bond to settle below 7% levels after the inclusion behind. In fact, Indian bonds and yields rallied 6-7 basis points after the announcement came in the morning and then retraced some of the gains.

Ten years ago India too faced a balance of payments crisis almost when the taper tantrum began and the US Federal Reserve decided to cut back on its bond buying programme, which would have resulted in liquidity drying up from financial markets. At the time, India became a member of the Fragile Five economies. With this inclusion, India has claimed its spot amidst bonds issued by other countries.