Global Bond Index India

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GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

India is likely to be included in the global bond indices early next year, which could attract $170 billion to $250 billion in bond inflows over the next decade.

Since 2019, India has been working toward getting included in global bond indices as rising government borrowing has necessitated opening the largely domestic bond market to a broader investor base.
Even after getting included in a global bond index by October, India will not be able to raise funds in the coming financial year as the actual listing could take around 12 months after its inclusion.

The inclusion in the global bond index could push the government to open its bond market further by removing foreign portfolio limits for all bonds in a bullish scenario.
- The foreign brokerage expects the rupee to appreciate by 2% every year in REER (real effective exchange rate) terms.
With increased foreign inflows, it is expected that central government deficit would reduce to 2.5% of GDP and consolidated deficit to reach 5% of GDP by FY29 from 14.4% in FY21.
It will push India’s balance of payments into a structural surplus zone, create an environment for a lower cost of capital and ultimately lead to a positive growth.
Opening up of the sovereign bond market and resultant inflows will have multiple implications for the banking sector, whereby large private banks are expected to benefit the most.
Also, apart from banks, non-bank lenders are also seen as beneficiaries over the longer run. The opening up of the sovereign bond market and the resultant potential implications like lower longer-term G-Sec yields could result in favourable structural implications for NBFCs.

Global investors suggested not to include India’s government bonds in global bond index due to capital controls, custody and settlement and other operational snags.

However, recent macroeconomic stability could change this in early 2022. India’s inclusion in the global bond index could have a to have profound implications for the economy, foreign exchange, bond yields, and equity markets
India has shown a significant improvement in macro stability and the government has indicated its desire to push for capex-driven growth which is expected to result in an inclusion in the global bond index, making it the last emerging market to join the group.

There have been concerns that if the bond market is fully opened to foreign investors, it could lead to outflows similar to hot money situation.
- Hot money: These are foreign investments that flood in to chase high yields but can exit just as quickly during times of distress.