Inclusion of Indian bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index

Inclusion of Indian bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index

Subject: Economy

Section: Financial Markets

The inclusion of Indian bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices represents a significant development in India’s presence in global financial markets.

Background:

• Bloomberg has announced the inclusion of Indian Fully Accessible Route (FAR) bonds in its Bloomberg EM indices.
• This move follows a similar announcement by JP Morgan Chase & Co last year, which included Indian government bonds in the JP Morgan GBI-EM Global index.

Phased Inclusion:

• The inclusion of Indian FAR bonds in the Bloomberg EM indices will occur in a phased manner over a ten-month period.
• It will begin on January 31, 2025, with an initial weight of 10% of their full market value.
• The weight of FAR bonds will then increase by increments of 10% every month until October 2025, when they will be weighted at their full market value in the indices.

Impact and Significance:

• The inclusion of Indian bonds in these indices reflects India’s growing importance in the global economy.
• India is expected to become the third-largest country, after China and South Korea, in the market cap weighted version of the Bloomberg EM 10% Country Capped Index.
• Using data as of January 31, 2024, the index would include 34 Indian securities, representing 7.26% of a $6.18 trillion index on a market value-weighted basis.

Benefits:

• Inclusion in global indices is expected to attract significant investments into India.
• It will bring dollar inflows into the country, helping to stabilize the financing of India’s current account gap.
• Analysts estimate that the inclusion could attract investments exceeding $5 billion, in addition to the expected investment of around $20 billion from the JP Morgan EM Bond Fund.

Future Plans:

• Bloomberg indices will create an ex-India version of the EM Local Currency Government Index.
• They can also create other standard and custom versions of the index, providing more investment options for investors interested in emerging market bonds.

Overall Impact:

• The inclusion of Indian bonds in global indices not only boosts India’s visibility in international financial markets but also opens up new avenues for investment in the country’s debt market.
• It signifies confidence in India’s economic growth trajectory and policy reforms, making it an attractive destination for global investors.

In conclusion, the phased inclusion of Indian bonds in the Bloomberg EM indices is a significant step that is expected to have positive implications for India’s financial markets, economy, and attractiveness to foreign investors.

About Emerging Markets Bond Index (GBI-EM):

It is a benchmark index for measuring the total return performance of international government and corporate bonds issued by emerging market countries. Emerging market bonds are debt instruments issued by developing countries, offering higher yields compared to bonds of developed nations.

Inclusion of India’s Local Bonds:

India’s local bonds will be included in the Government Bond Index-Emerging Markets (GBI-EM) of JP Morgan. Expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD).

23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are eligible for inclusion.

All bonds are classified as “fully accessible” for non-residents.

Advantages of Inclusion:

• Increased demand for the Indian rupee, potentially buffering against depreciation.
• Lower borrowing costs can fuel essential infrastructure projects.
• Enhanced liquidity may foster more efficient trading conditions.
• Market Development and Innovation
• Par with Other Countries – India reaches 10% weightage in GBI-EM Global Diversified, aligning with countries like China, Brazil, Indonesia, and Malaysia.

Fully Accessible Route (FAR):

Brief:

• RBI has introduced the Fully Accessible Route (FAR) to enable non-residents to invest in specified government bonds.

Key Features:

• Eligible investors can invest in specified government securities under FAR without any investment ceilings.
• Operates alongside the existing routes, namely the Medium Term Framework (MTF) and the Voluntary Retention Route (VRR).

Benefits:

• Substantially eases access for non-residents to Indian government securities markets.
• Facilitates inclusion in global bond indices, enhancing the visibility of Indian bonds in international markets.
• Encourages stable foreign investment inflows into government bonds, promoting financial stability.

Voluntary Retention Route (VRR):

Brief:

• RBI introduced the Voluntary Retention Route (VRR) to encourage Foreign Portfolio Investors (FPIs) for long-term investments in Indian debt markets.

Key Features:

• Aggregate investment limit: ₹ 40,000 crores for VRR-Govt and ₹ 35,000 crores for VRR-Corp.
• Minimum retention period of three years, during which FPIs must maintain a minimum of 75% of the allocated amount in India.
• Greater operational flexibility in terms of instrument choices and exemptions from certain regulatory requirements for FPIs.