Implications of India's listing on global bond market indices

India is the world's fastest-growing economy and yet there is no mention of the Indian debt market on global indices. Most major economies are listed since a long time.

“India has made significant strides in macroeconomic stability, and its government is more motivated than ever to encourage corporate-investment-driven growth," says Chief India Economist Upasana Chachra.

“We think India will be included in two of the three major global bond indices in early 2022."

Beyond the direct benefits of index inclusion—it could trigger $170 billion in bond flows over the next decade, lifting Indian bond prices while lowering borrowing costs—this milestone could have profound implications for the country's currency, corporate bonds and equities.

A few implications of global-bond-index inclusion for India, and why it could signal the emergence of a new India.

1. Immediate Boost for Government Bonds

Major indices don't simply track their respective markets—they influence them. When an index adds new constituents, portfolios pegged to those benchmarks must adjust their allocations accordingly. “India's inclusion would trigger significant index-related inflows, followed by an allocation from active global bond investors," says Min Dai, Head of Asia Macro Strategy.

2. Shrinking Deficit, Stronger Rupee

Index inclusion, while significant on its own, would also signal policymakers' desire to support higher economic growth through investment. “This will push India's balance of payments into a structural surplus zone and indirectly create an environment for lower-cost capital and, ultimately, be positive for growth," says Chachra, adding that India's consolidated deficit could shrink to 5% of its GDP by 2029, down from 14.4% for the 2021 fiscal year.

India’s currency would also feel the impact. The shrinking deficit could bolster the value of the Indian rupee by 2% a year against a basket of other major currencies, in exchange rate terms. While India's long-term 4% annual inflation would imply a 2% depreciation in the value of the rupee in nominal terms, at around a 6% yield, Indian government bonds could offer investors medium-term returns of around 4% in dollar terms, “which is quite attractive for foreign investors," says Dai.

3. Capital needs of Corporates

Inclusion in global bond indices could also help Indian corporations with their capital needs. When foreign capital flows into government bond markets, it lowers overall borrowing costs, improves debt sustainability and also drives demand for other—read corporate—fixed-income securities. That's potentially good news for India's domestic corporate bond market, which foreign investors have largely overlooked.

Foreign investors would gain access to a significantly larger pool of Indian corporate issuers.

4. Equities Buoyed by Better Growth

The opening of India's sovereign bond market may also bode well for equities, which stand to benefit from lower borrowing costs and a healthier macroeconomic backdrop. Among these, large private banks could be the most obvious winners. Still, nonbank financials— such as those focused on mortgages, credit cards, insurance and asset management—could enjoy the spillover effects of a more robust bond market in India.

Sources:

1. Morgan Stanley research report

2. India's global indices report

3. RBI Press Release dated 8 October 2021

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