India is the largest Emerging Market economy that is yet to be included in commonly-followed bond indices, but this is about to change.
Foreign investors are now able to more easily invest in specified Indian debt via the Fully Accessible Route (FAR). This route was opened in April 2020 and removes quotas, which heretofore had been a major barrier to index inclusion. Issuance of this new type of debt is already at $400bn and is now more than a third of all outstanding central government debt.
Fiscal policies to cushion the economy from the effects of the COVID-19 pandemic and stimulate demand have led to increased borrowing, and India now must balance fiscal discipline vis-a-vis the need to fund infrastructure growth. Broadening the investor base will be a key plank of this strategy.
Leading index provider JP Morgan has announced the inclusion of India government bonds in their flagship GBI-EM GD Index. Inclusion will be phased-in starting in 2Q24, growing by 1% every month until it reaches the threshold at 10%.
Access to a diversified capital base could aid India to fund its balance of payment deficit, while foreign investors benefit from the strong diversification and attractive risk-return profile offered by India’s local currency bonds.
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