Bloomberg announced last week that it had included India in its Bloomberg Emerging Market Local Currency Government Index and related indices. After JP Morgan, Bloomberg is the second index provider to include India.
The announcement, however, has not enthused the Indian markets. The reaction was muted in relation to what it was when JP Morgan announced its inclusion of Indian gilts in September.
As they always have, policymakers, too, shrugged off the development, with Reserve Bank of India Governor Shaktikanta Das saying it was a double-edged sword.
True, this move will bring billions into the Indian government bond market, but it could also mean billions could move out in a hurry at the first sign of trouble or alternate opportunity, causing volatility.
Second Index
On Mar 5, Bloomberg said it would include India's Fully Accessible Route (FAR) government bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices in a phased 10-month period starting Jan 31, 2025.
The Indian FAR bonds will be included in the Bloomberg EM Local Currency Government indices with an initial weight of 10⁒ of their market value.
The weight of FAR bonds will be increased in increments of 10⁒ of their total market value every month over the ten months ending in Oct 2025, at which point they will be weighted at their total market value in the indices.
Bloomberg said in a statement that the indices in scope for inclusion include the Bloomberg EM Local Currency Government Index, the Bloomberg EM Local Currency Government Index 10⁒ Country Capped Index, and all related sub-indices.
Once completely phased into the Bloomberg Emerging Market 10⁒ Country Capped Index, India is expected to join China and South Korea as markets that reach the 10⁒ cap.
Within the market cap-weighted index version, India is expected to be the third largest country after China and South Korea.
The index would include 34 Indian government bonds and represent 7.26⁒ of a $6.18 trillion index on a market value-weighted basis.
Bloomberg said that the decision to include India FAR Bonds in the Bloomberg EM Local Currency Government Index was made after extensive consultation to solicit market participants and stakeholder feedback.
Bloomberg is the second index after JP Morgan.
JP Morgan said it would include India in its Government Bond Index—Emerging Markets starting June 28, 2024. India will be included in the GBI EM Global Diversified Index, which has assets under management of around $213 billion.
JP Morgan said India will get a weight of 10⁒, with 1⁒ added each month between Jun 28, 2024, and Mar 31, 2025, a move that could bring in $20 billion-$25 billion.
The Good
Bloomberg's inclusion boosts investors' confidence in India.
"India's continued emergence as a global financial centre promises to be one of the most significant economic developments of this decade, and Bloomberg is committed to bolstering it by connecting more investors to India," said Michael Bloomberg, founder of Bloomberg LP.
The bond index inclusion and the Indian government's resoluteness in containing its fiscal deficit could lead to its officials demanding a sovereign rating upgrade.
This could mean more inflows into India.
The bond index inclusion and the subsequent inflows into India could also boost demand for corporate bonds, fundraising, and private sector capex, accentuating India's growth even further.
Bloomberg's move would add an estimated $4 billion of foreign fund inflows into India, following the $20 billion—$25 billion that would flow due to JP Morgan's move.
This alleviates any concerns over funding India's current account deficit. (There are no concerns at this stage, as CAD is moderate. CAD was 1⁒ of GDP in July-September 2023 vs 3.8⁒ in July-September 2022.)
FTSE Russel is the other index provider that has yet to decide on India's inclusion in bond indices. Following the actions of JP Morgan and Bloomberg, this provider may also add India, sustaining the inflows.
India now boasts of having the fourth-largest foreign exchange reserves. With RBI set to add more to its reserves due to debt inflows, India's external sector will remain strong.
The Not So Good
The bond market largely shrugged off Bloomberg's announcement because the expected inflows are small relative to JP Morgan, and they will not be immediate.
The assets under management are small; consequently, the inflow into India will be less than $4 billion.
The long period for full inclusion was also a disappointment.
Some traders noted that other countries took shorter to fully integrate, while Bloomberg has maintained a 10-month staggered inclusion for India.
Traders were hoping that India would join the Global Aggregate Index and were disappointed that India was being included in a smaller index. The Global Aggregate Index has some $60 trillion in management, according to reports.
In an interview with the Economic Times, Nick Gendron, global head of fixed income index product, Bloomberg Index Services, said India will be kept on review for inclusion in the Bloomberg Global Aggregate Index.
India is making a solid case for a rating upgrade.
It would help if such an upgrade happens and index providers put India into more extensive indices.
The market may have shrugged off Bloomberg's move. But it marks another important step for India's financial markets in general and the bond market in particular.
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