The addition of Indian bonds to global indexes could be a gamechanger.

• The inclusion of Indian government bonds in two major global indexes is seen as a boost for the country's economy and is expected to attract billions of dollars in investments.
• In June, JPMorgan added India's bonds to its Government Bond Index-Emerging Markets (GBI-EM), as announced in September.
• According to Goldman Sachs, India's bond markets are expected to receive inflows of approximately $40 billion during the scale-in period, which amounts to around $2 billion per month.
• Institutional organizations such as banks, mutual funds, and insurance firms have been the biggest buyers of India's government debt. However, with the addition of global indexes, the country can now diversify its avenues to raise funds.

The inclusion of Indian government bonds in two major global indexes is seen as a boost for the country's economy and is expected to attract billions of dollars in investments.

In June, JPMorgan added India's bonds to its Government Bond Index-Emerging Markets (GBI-EM), as announced in September.

India's first ever inclusion on a global bond index is reportedly the JPMorgan inclusion.

Bloomberg Index Services has announced that it will include Indian government bonds in its Emerging Market Local Currency Government Index starting from January 31, 2025.

The inflow of billions of dollars into India's rupee-denominated government debt could lead to a fall in bond yields, thereby supporting the local currency as demand rises.

According to Deepak Agrawal, the chief investment officer of debt at Kotak Mutual Fund, the rebalancing period starting in June 2024 is expected to result in stable flows of approximately $25 billion to $30 billion over the next 12 to 18 months.

Agrawal stated that this action is a step in the correct direction.

According to Goldman Sachs, India's bond markets are expected to receive inflows of approximately $40 billion during the scale-in period, which amounts to around $2 billion per month.

JPMorgan has announced that it will gradually add Indian bonds to its index over a 10-month period, starting with a 1% weightage in June and reaching a maximum of 10% in April 2022.

Big bump to growth

The inclusion of Indian bonds by JPMorgan has been celebrated as a "significant achievement" by Invest India, the government's national investment promotion agency.

The agency stated that the inclusion will aid India in achieving its goal of a $5 trillion economy by 2030, while also helping Asia's third largest economy integrate with the global economy.

To increase funds, manage borrowing costs, and expand the investor base for government securities, India needs to take action.

Indian banks, as a result of their stable long-term global investments, will have more funds to lend domestically, which will lead to infrastructure development and job creation, according to Invest India.

The sovereign bond market of India was worth $1.2 trillion in October, with domestic institutional investors being the primary investors, as per Invest India.

Does this make it easier to invest in India?

The Indian economy is rapidly expanding and the government has implemented measures to stimulate growth, particularly through increasing investment in infrastructure.

Certain import restrictions have made it difficult to conduct business in India due to layers of protectionism.

Kenneth Akintewe, head of Asian sovereign debt at investment firm Abrdn, stated that index inclusion alone does not simplify investing in India, according to CNBC.

According to Akintewe, adding Indian bonds to global indexes would attract more investors to the country, as the market has been performing well.

"The establishment of the fully accessible route (FAR) component of the government bond market, which has led to index inclusion and the growth of FAR securities as a proportion of the market, simplifies investing."

Eligible investors can invest in specified government securities without any ceiling limits under the fully accessible route, allowing foreign investors to enter the Indian bond market.

It is estimated that adding to indexes could result in a "passive flow of $30 billion."

Fitch Ratings predicts that JP Morgan's bond index inclusion could result in approximately $24 billion in passive inflows between June 2024 and March 2025. However, the note suggests that flows could be even greater if other indexes also decide to include Indian government securities.

The ratings agency stated that although this action may slightly decrease funding costs and aid in the growth of domestic capital markets, the direct positive impact on India's credit rating will be minimal in the short term.

Bonds vs. stocks

In 2023, India's stock markets reached new heights, achieving eight consecutive years of growth.

In February, India's domestic equity funds experienced a 23-month high of $3.2 billion in monthly inflows, as reported by the Association of Mutual Funds in India. Additionally, Goldman Sachs stated that India received foreign inflows of $2.2 billion during the week ending March 15.

Radhika Rao, a senior economist at DBS, stated that local currency sovereign bonds were likely to experience growth due to strong foreign investments.

Indian government bonds will now have more fundraising opportunities as they have been included in global indexes, and institutional investors such as banks, mutual funds, and insurance firms have been the biggest buyers of India's government debt so far.

Akintewe of Abrdn stated that diversifying India's funding sources relieves pressure on domestic investors, drives funding costs lower, aids the fiscal position, eliminates the need for U.S. dollar sovereign debt, and encourages further capital market development.

— CNBC's Clement Tan contributed to this story.