Indian Bonds to be Included in Global Bond Market Indices

A recent report by Morgan Stanley has highlighted that Indian bonds could be included in global bond market indices before February 2022. The Indian government has been lobbying for some time with global index majors like JP Morgan, FT and MSCI for inclusion in the global bond indices. That effort appears to be fructifying.

As per a recent report by Morgan Stanley, India was likely to be included in JP Morgan’s GBI-EM (Global Bond Index – Emerging Markets) as well as in the Global Aggregate Index. However, it will take some more time before India is included in the World GBI indices as Indian bond markets are yet to reach that level of depth and liquidity. 

Why is the inclusion in global bond indices important? Typically, a large chunk of the global money gets allocated by passive funds like index funds and ETFs. This is true of equities and also of bonds. While India has been present in most of the benchmark equity indices, it had been absent in the bond indices. That had impacted global capital flows into Indian debt.

It is estimated that the inclusion in the bond index would right away result in infusion of an impressive $40 billion into Indian debt. Also, Morgan Stanley, has pointed out in its report that over the next 10 years, Indian bonds could get as much as $250 billion of flows from such passive funds. That would not only reduce the pressure on equity flows, but make bond markets substantially more liquid.

Also Read: Difference Between Convertible and Non-Convertible Debentures

Currently, foreign ownership of Indian government debt is less than 2%. This figure is expected to increase to 9% over the next decade. This would also impel the Indian government to remove foreign portfolio limits on bonds. Morgan Stanley has also estimated that the rupee could appreciate 2% over next few years and that would add to the dollar yields for global investors and make effective yields a lot more attractive.