In case you are wondering how much influence India has in the global financial market, it’s about to take a significant leap forward. Bloomberg recently announced that Indian bonds will be progressively included in their Emerging Market (EM) Local Currency Bond Index starting January 31, 2025. This inclusion is a significant development for India’s financial market, and it’s bound to have a ripple effect globally.
What does the inclusion mean?
Let’s break it down. Bloomberg’s EM Local Currency Bond Index is a benchmark index that tracks the performance of local currency bonds issued by governments in emerging economies. By including Indian bonds in this index, Bloomberg acknowledges India’s growing importance in emerging markets.
India’s Rise in the EM Bond Index
This inclusion marks a significant milestone for India, propelling it to the anticipated position of the third-largest country within the index, following China and South Korea. This signifies the growing importance and recognition of the Indian bond market globally.
How will the inclusion happen?
It will be phased gradually over 10 months, starting from January 2025. Initially, Indian bonds will have a 10% weight in the index. This weight will increase by 10% monthly, reaching 100% of its market value by October 2025.
Let’s talk numbers
34 Indian bonds will be included in the index, representing approximately 7.26% of the index’s total weight. This might seem like a small percentage, but it’s a significant step forward for India’s bond market.
Benefits of this inclusion.
Including Indian bonds in the EM Local Currency Bond Index will bring several advantages to Indian and international investors.
- The inclusion in the EM Local Currency Index is projected to attract significant foreign capital, potentially exceeding $5 billion, from both passive and active investors. This influx of funds will inject liquidity and stability into the Indian bond market, fostering economic growth.
For Indian issuers:
- Increased access to global capital: The inclusion will make Indian bonds more accessible to international investors, potentially leading to a broader investor base and increased demand for Indian bonds. This, in turn, could lead to lower borrowing costs for Indian companies and the government.
- Enhanced market credibility: Inclusion in a globally recognized index like Bloomberg’s EM Local Currency Bond Index will improve the credibility and visibility of the Indian bond market, attracting more foreign investors and boosting investor confidence.
For international investors:
- Increased diversification: Including Indian bonds allows international investors to diversify their portfolios and gain exposure to the growing Indian economy.
- Improved risk-return profile: Indian bonds offer attractive potential returns, and their inclusion in the index could help investors improve the overall risk-return profile of their portfolios.
What are the challenges?
The Indian bond market is still relatively underdeveloped compared to other emerging markets. Additionally, there are concerns about foreign exchange volatility and potential regulatory changes in India.
Overall, including Indian bonds in Bloomberg’s EM Local Currency Bond Index is a positive development for the Indian economy and financial markets. It is expected to bring significant benefits to domestic and international investors while presenting some challenges that must be addressed.
Conclusion
This is the beginning of a new chapter for India’s bond market. The inclusion in this index is a testament to the country’s growing economic strength and increasing integration with the global financial system. As India continues to develop its bond market and address existing challenges, we can expect to see even greater participation from international investors in the future.
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I’m Archana R. Chettiar, an experienced content creator with
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