India’s imminent inclusion into the Bloomberg EM Index has come as an icing on the cake and would further boost foreign portfolio investments in country’s debt markets in 2024, say economists and analysts.

This is also expected to support increased debt issuances by the government in the coming years. Ahead of the Indian government bond inclusion in global bond indices from June 2024, several FPIs are expected to front load their investments in the debt markets this year.

This would come on top of the record $7.1 billion pumped into Indian government bonds by the foreign portfolio investors in 2023, they said. This was led by the G-Sec Fully Accessible Route (FAR) window, as investors frontloaded purchases ahead of the inclusion into the global indices. 

Gaura Sengupta, India Economist, IDFC FIRST Bank, said that India’s inclusion into the Bloomberg EM bond index is likely to generate inflows of $2 billion to $3 billion spread over 5 months, starting from September 2024. 

“Though this is a small amount, it’s incremental good news for g-secs”, Sengupta said.

The JP Morgan EM bond index is far larger and India’s inclusion in that index is expected to generate FPI inflows of $30 billion spread over 10 months, starting from June 2024-end. “We maintain expectations of G-sec yields reducing to 6.8 per cent in FY25”, she added.

Radhika Rao, Senior Economist at Singapore-headquartered DBS Bank, said these inclusions stand to improve the demand-supply dynamics for the sovereign bonds by tapping a significant under-realised investor group. This would also help balance fiscal discipline with the need to boost infrastructure capabilities and support the overall balance of payments math, she added. 

Anticipation of further portfolio flows is likely to convince the authorities to continue absorbing flows passively to bolster defences and keep the rupee on a predictable as well as stable path, Rao added. 

Bloomberg Index Services Ltd (BISL) on Monday said that it proposes to include the Indian government’s Fully Accessible Route (FAR) bonds in the Bloomberg Emerging Market (EM) Local Currency Index. This will be phased over a five month period starting September 2024. Bloomberg has sought feedback on the proposed inclusion of India bonds by January 2025.

Sok Yin Yong, Fixed Income Analyst Asia, Julius Baer, said in a recent note that Indian Government Bonds are expected to continue to attract foreign inflows ahead of the index inclusion, which will be staggered between June 2024 and March 2025.

Given optimism over India’s growth prospects, a boost from bond index inclusion starting in June, and US rate cut expectations, foreign inflows into Indian government bonds (IGBs) jumped to a six-year high in the last quarter of 2023, Yong said. 

The Clearing Corporation of India Ltd. data showed that foreign investors bought a net ₹35,000 crore ($4.2 billion) in bonds between October and December 2023, bringing the full year inflows to ₹59,800 crore, the highest level since 2017.

India’s economy is expected to remain resilient in the near-term, backed by strong domestic demand and accelerated government spending ahead of the elections this year. The country’s GDP growth is likely to touch 7 per cent this fiscal, according to Reserve Bank of India.

The US Fed’s pivot towards rate cuts has also given emerging markets, such as India, a boost. 

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