This inclusion, announced last year, will boost buying of index-tracking funds Indian Bonds To align their portfolio with the index, thereby creating immediate demand. It also increases the visibility of Indian bonds and their credibility, thereby attracting investors. Investment from a wide range of foreign investorsIt is estimated that $20-25 billion of foreign investment will come to India in FY25, as the weightage of Indian bonds in the index will be 10%.
Index-chasing funds are estimated to have invested up to $500 million in the bond markets on Friday. Capital flows The rupee strengthened against the dollar and rose from 83.45 to 83.38. Despite the surge in the price of the dollar and crude oil in the international markets, the rupee strengthened against the dollar due to fund inflows.
Parul Mittal Sinha, head of financial markets in India at Standard Chartered Bank, said, “Non-residents have invested nearly $10 billion in Indian government bonds since October 2023, and an additional $5 billion through dollar-settled, rupee-denominated supranational bonds. With inflows of $2.3 billion in June alone, there is a high degree of confidence that index trackers will have a 10% weighting allocated to India by the end of March 2025.”
India's local debt stock is $1.3 trillion of government bonds which is the second largest in emerging markets, with bonds included in the index at over $400 billion, second only to China. India has the largest government bond market in the region because historically fiscal deficits have been very high for which banks were used as captive investors. Now that foreign investors are buying a larger share of bonds, banks will have more money to lend which will lead to better rates.
Radhika Rao, senior economist at DBS Bank, said in a note, “India's relatively high yields among other index constituents could potentially persuade active managers to adopt an overweight stance for these papers, as well as for dedicated passive names. As it is, positive real yields, low rupee volumes, a supportive macro backdrop, strong hedges against market volatility (record high reserve stocks) and ongoing fiscal consolidation are the key factors that make IGBs (Indian government bonds) attractive to investors. In the near term, we do not expect these flows to trigger significant volatility in the rupee or liquidity, courtesy of the central bank's active presence to dampen volatility.”
