Why Inclusion of Indian Bonds Matters in Global Indices Matters?

On June 28, 2024, Indian government bonds were added to JPMorgan’s Government Bond Index-Emerging Markets. This is seen ushering a new era for Indian debt instruments and huge foreign inflows.
The inclusion of Indian government bonds into this index comes after more than a decade of discussions between the government and the compiler of the index. The talks had first begun in 2013 amid the 'taper tantrums' that had caused the Indian rupee’s exchange rate to hit all-time lows against the US dollar on a daily basis. Becoming a part of such a bond index was seen as a way to shore up investor confidence and boost the country’s foreign exchange reserves and stabilise the exchange rate.
 

What exactly is a bond index?
 

A global bond index compiles a set of countries to inform and guide international investors such as pension funds, mutual funds, and passive investors on the movements in government debt prices in each location. Each country part of an index accounts for a certain portion of the index. As such, investors who closely track these indices use the weightage used to inform their investments in that market segment.
For example, India’s weight in the relevant index will increase to 10 per cent over a 10-month period starting June 2024. So, investors who are tracking this index can be expected to put 10 per cent of their investments in emerging market debt in India.
There are, of course, a variety of global bond indices constructed by different entities and JPMorgan’s emerging market index is just one of them.
 

Why weren’t Indian bonds part of them until now?
 

A key determinant of a country becoming a part of these global indices is how easy it is for foreign players to invest in the respective government’s debt. For example, while foreign investors have been able to invest in Indian government bonds for a long time, there were certain restrictions in place to reduce the volatility in the domestic bond market from any sudden exodus of these foreign investors.
However, this issue was seemingly resolved when the Reserve Bank of India allowed foreigners to invest in certain government bonds without any limits or restrictions. It is these bonds that are being include in the JPMorgan index.
Another matter that has been a bone of contention between the Indian government and index providers has been taxation, with India unwilling to give preferential treatment to the profits foreign investors make from any sale. While the government has not relented on this, matters seem to have been resolved on the whole to allow for India’s inclusion in indices.
 

Huge foreign inflows into Indian government bonds
 

Just how much foreign money will come into the Indian government bond market because of the index inclusion? According to experts, anywhere between $20 billion-25 billion – or around Rs 2 lakh crore – could be invested in Indian government debt over a period of 10 months.
How does this amount compare with the size of the Indian bond market? At the moment, the total quantum of Indian government bonds available in the market are Rs 105 lakh crore. Of this, around Rs 35 lakh crore worth of securities are set to become a part of the JPMorgan indices.
 

Likely impact on prices, yields of Indian debt instruments
 

An increase in investments in government bonds will lead to a rise in prices – something that has already been happening in the lead up to the bond index inclusion. As prices rise, yields – that move in the opposite direction – will fall.
Higher investor demand, therefore, is expected to reduce the yield on Indian government bonds and reduce the government’s cost of borrowing. As such, those who had purchased Indian government bonds at lower prices could gain significantly in the coming months.
At the same time, greater inflow of foreign capital will help strengthen the Indian rupee’s exchange rate. To ensure the rupee does not appreciate very rapidly, the Reserve Bank of India may have to keep a check on this currency appreciation by buying foreign currency with Indian rupees. This will also add to the Indian central bank’s foreign exchange reserves, which is seen as another positive in India’s macroeconomic story.
 

Can retail investors benefit from these inflows?
 

It is not just institutional investors who can benefit from the increased foreign inflows into Indian government debt; retail investors can also stand to gain from the wave of money that is expected to come into this segment.
Individuals can invest in the Indian government’s bonds directly through a platform devised and operated by the Reserve Bank of India. This platform, called RBI Retail Direct, allows individuals to place bids on various types of Indian government securities, ranging from long-term bonds and short-term Treasury Bills maturing in one year and earlier to even bonds issued by Indian state governments.
Not only can members of the public bid for government bonds on the platform at their primary auction, they can also trade these bonds in the secondary market. Of course, retail investors can only participate on the platform after going through a thorough Know-Your-Customer checks.
In addition to the website, the Reserve Bank also launched a mobile application in May 2024 to boost the participation of retail investors in the government securities market. The app, also called RBI Retail Direct, so far has more than 1 lakh downloads on the Google Play Store.