Indian Bond Inclusion in Global Index : Analysing Impact & Implications

Summary

Do Bond inclusions have some relevance or significance for markets?
The move is big and strategic but before we celebrate - let’s analyze data to understand how much significance it has?

Indian Sovereign Bonds finally found a place in Global Bond Indexes. JP Morgan’s emerging market index has $213 Bn of bond investments linked to their index.
India's current weight in JPM indices is 0, Now will start with 1% from June-24 & will increase by 1%/month to reach 10% market cap by 31st March 2025.

Do Bond inclusions have some relevance or significance for markets?
The move is big and strategic but before we celebrate - let’s analyze data to understand how much significance it has

From above comparisons with respective data points, it’s clear that bond inclusion will not have much impact on foreign. The $2.5 bn (INR 2000 cr) will be a monthly inflow of foreign money starting from June-24, this is not a big amount. 

Will the Rupee get stronger against the Dollar?
No, since foreign inflows from debt inclusion are not significant, its ability to affect Rupee-Dollar is limited. 2022 saw approx INR 1.32 Lacs crore of FPI outflows across all segments (equity + debt), such exodus of foreign outflows hardly affected Rupee-Dollar. Thanks to RBI for their pretty good foreign currency management. The forward rates are also hovers around spot rates which is an evident of the fact that stakeholders are not expecting the major moves in Rupee-Dollar

Are Indian Bonds attractive for foreign investors? Will bond inclusion bring some respite to Indian interest rates?
Though Indian bonds are attractive as Indian 10Y Sovereign bonds yield is around 7-7.5% while in US its around 4-4.5%. The rising US bond yields may make Indian Bond markets less attractive for foreign investors. Further continuous softening of rupee against dollar also impacts foreign investor’s returns on Indian bond markets since these bonds are rupee denominated (foreign investors have to buy these bonds in INR).
Though we can expect some respite (could be 0.25% lower interest rates) in Indian interest rates owing to JP Morgan Bond inclusion.


Broader Impact
The big picture we have to see here is the development of Indian bond markets and more formalisation of Indian bonds owing to their inclusion in reputed global bond indexes which have high index criteria. Indian Bonds markets are third largest among emerging markets after China and Brazil; triple of Indonesia Bond markets. While foreign ownership of Indian bonds is around 2% which is far lower than its peers in emerging economies.

As per Fitch Note, “IMF research published in September 2020 suggests inclusion in major benchmark indices can reduce the sensitivity of a country’s capital flows to domestic economic shocks, but at the cost of raising exposure to volatility in international sentiment and global financial market conditions.”

We can expect better fiscal policies and other policy changes for better and stable domestic macroeconomic conditions.

The key event to watch for inclusion in other bond indexes like FTSE (kept on the watch list again..!) and Bloomberg which are expected to generate similar inflows if included.

Improvement of India’s sovereign credit could be a bigger moment..! But for the time being, we take a pause on thoughts..!

Summarising above:

1. Will not impact foreign inflows
2. Will not impact Rupee-Dollar 

3. Will not impact demand of Indian Bonds

4. Will not impact much on interest rates

5. Catalyst for the development of bond markets in India

6. Better fiscal and other policies