India’s Strategic Leap into Global Bond Indices

The inclusion of Indian Government Bonds (IGBs) in global bond indices has had a tangible impact on the financial markets since June 2024. The immediate aftermath of this strategic move saw substantial passive inflows of approximately $21 billion into Indian markets by September 2024, contributing to a 12% increase in overall trading volume. The heightened demand for IGBs has pushed yields down by nearly 15 basis points, with benchmark 10-year yields hovering around 6.55%, making government borrowing more cost-effective.

This inclusion has led to increased foreign ownership of Indian bonds, which currently stands at over $785 billion, marking a notable jump from previous quarters. The market’s liquidity has improved significantly, with tighter spreads and reduced volatility observed in bond and currency markets. With an anticipated weightage of 10 per cent in the GBI-EM GD index and around 8.7 per cent in the GBI-EM Global index, Indian bonds are expected to attract more than $30 billion by early 2025 as Bloomberg Barclays completes the integration of Indian bonds into its Emerging Market (EM) Local Currency Government indices.

However, the rapid influx of foreign capital has not come without challenges. The Reserve Bank of India (RBI) has had to intervene multiple times to manage excess volatility in the forex and debt markets, ensuring the rupee remains stable amidst fluctuating capital flows. The RBI’s intervention, coupled with the strategic interest rate policies, has been crucial in maintaining market equilibrium and investor confidence.

Moving forward, India’s potential inclusion in other major indices like FTSE Russell is expected to further strengthen its position in global fixed-income markets. This growing momentum positions India as a formidable competitor to China, not only in terms of economic growth but also in the scale and depth of its bond market. As the second-largest bond market among emerging economies, India is poised to attract substantial long-term global capital, backed by consistent GDP growth and a stable macroeconomic framework.

With continued reforms and well-calibrated policy measures, India is on the verge of becoming a dominant force in the global financial landscape. This progress enhances its appeal to international investors, ensuring a steady flow of capital to sustain its growth trajectory.

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