India’s Inclusion in Bloomberg EM Index

India’s Inclusion in Bloomberg EM Index

Subject :Economy

Section :External Sector

Bloomberg Index Services Ltd (BISL) has proposed the inclusion of India’s Fully Accessible Route (FAR) bonds in the Bloomberg EM Local Currency Index.

Boost to Foreign Portfolio Investments (FPIs):

• India’s imminent inclusion in the Bloomberg Emerging Market (EM) Index is anticipated to stimulate foreign portfolio investments in the country’s debt market in 2024.

Support for Debt Issuances:

• The inclusion is expected to bolster increased debt issuances by the Indian government in the coming years, providing support for economic activities.

Frontloading by Foreign Investors:

• Foreign investors, particularly Foreign Portfolio Investors (FPIs), are expected to front load investments in the Indian debt market ahead of the official inclusion in global indices, aligning with the record $7.1 billion invested in Indian government bonds by FPIs in 2023.

Inflow Projections:

• Economists and analysts estimate that India’s inclusion in the Bloomberg EM bond index could generate inflows of $23 billion over five months, beginning in September. The larger JP Morgan EM bond index is expected to attract FPI inflows of $30 billion over ten months, starting in June.

Impact on Government Securities (GSecs):

The inclusion is seen as good news for Government Securities (GSecs), with expectations of reduced G-Sec yields to 6.8% in FY25.

Improved Demand-Supply Dynamics:

• Inclusions in global indices are expected to enhance demand-supply dynamics for sovereign bonds, tapping into a significant but underrealized investor group. This can support fiscal discipline while addressing infrastructure needs.

Balancing Fiscal Discipline:

• The anticipated portfolio inflows may prompt authorities to passively absorb flows, reinforcing defenses and maintaining a stable path for the Indian rupee.

Optimism for Growth Prospects:

• With optimism surrounding India’s growth prospects, coupled with the boost from bond index inclusion and expectations of US rate cuts, foreign inflows into Indian government bonds reached a six-year high in Q4 2023.

Record Inflows in 2023:

• Foreign investors bought a net ₹35,000 crore in bonds between October and December 2023, contributing to the highest annual inflows since 2017, totaling ₹59,800 crore.

Impact on Indian Economy

Positive Boost to Forex Reserves:

• The anticipated $3 billion additional Foreign Portfolio Investments (FPIs) in the Indian debt market will contribute to an increase in foreign exchange reserves. This is crucial for maintaining a robust external position and ensuring liquidity in the economy.

Stabilization of Rupee:

• Increased FPI inflows typically lead to a strengthened Indian rupee. A stable and appreciating currency enhances investor confidence, attracts further investments, and helps in controlling inflation by making imports more affordable.

Lower Borrowing Costs:

• Higher FPI investments in Indian debt instruments can result in increased demand for government bonds. This heightened demand often leads to lower yields and, consequently, reduced borrowing costs for the government. This is favorable for fiscal management.

Support for Economic Growth:

• The injection of foreign capital into the debt market provides a vital source of funding for the government. These funds can be channeled into various economic development initiatives, infrastructure projects, and social welfare programs, contributing to overall economic growth.

Market Liquidity and Depth:

• FPI inflows enhance liquidity and depth in the debt market.
• A more liquid market is better equipped to handle large transactions, and increased depth ensures a broader range of investment opportunities for both domestic and international investors.

Confidence in Indian Financial Markets:

• Positive sentiment generated by substantial FPI inflows signals confidence in the stability and attractiveness of Indian financial markets. This confidence can attract further foreign investments across various asset classes, including equities and bonds.

Balance of Payments Improvement:

• Higher FPI inflows positively impact India’s balance of payments by improving the current account balance. This, in turn, contributes to the overall stability of the country’s external sector.

Potential for Lower Interest Rates:

• As FPIs increase their exposure to Indian debt, the resulting demand can lead to lower interest rates in the domestic market. Lower interest rates stimulate borrowing and spending, providing a boost to economic activities.

Investment in G-Secs and Corporate Bonds:

• FPIs investing in government securities (G-Secs) and corporate bonds can diversify their portfolios and contribute to the development of the Indian corporate debt market.

Risks and Policy Response:

• While FPI inflows bring several benefits, there may be challenges, such as potential currency appreciation. The central bank may implement policy measures to manage such risks and maintain a balanced economic environment.

In summary, the anticipated FPI inflows into the Indian debt market are expected to have multifaceted positive impacts, ranging from currency stabilization to economic growth support and enhanced market dynamics.