The Indian bond market is set to see an influx of nearly USD 40 billion following India’s inclusion in the global bond Index in early 2022, as per reports. This move is poised to make a huge impact on the country’s economy, forex market, bond yields, and equity markets, reports said. Currently, the Indices of the USA, UK, Japan, Germany, France, China, Canada, and Australia are a part of the global bond Index.

Industry pundits expect a one-time inflow of around USD 40 billion in 2022-23 followed by annual inflows of USD 18.5 billion following India’s inclusion. This would lead to an increase in foreign ownership which will bring significant change to the Indian debt market. Experts opine, India has shown a massive improvement at the macro level and hence the government wants to expand its current operations for future growth. This will lead to India’s balance of payments being on the surplus side.

Balance of payment(BOP) is the difference between all the money flowing into the country and the money flowing outside the country. A surplus balance of payment would lead to an appreciation of INR approximately by 2% in the real effective exchange rate.

The real effective exchange rate (REER) is the measure of the value of the currency against the weighted average of several foreign currencies.

Increased foreign inflows would mean lower borrowing costs and debt sustainability- two things that are vital for India in order to keep up with the current Investment grade ratings. The main reason why borrowers tend to borrow money in foreign currency, even though it is far riskier than borrowing in domestic currency, is because it's cheaper.

If the domestic financial sector is small, the local supply of financing may not be sufficient to satisfy the overall demand for credit at a favorable cost. When the borrowing takes place in the domestic market debts are often measured in regard to foreign currency. This makes the borrowing in the domestic market costlier as it is indexed to foreign currency. Borrowing in foreign currency facilitates investment and economic development of the country as it provides the country with affordable pricing. This can reduce the interest rate and increase private investments. Importing overseas capital helps the government to ease the pressure on local sources of funding thereby encouraging private investments to spend more.

The country's debt is considered sustainable if the government is able to meet its current and future payment obligations without going into default..

India’s inclusion will also benefit the domestic equity market as it will have a positive impact on the overall growth of the economy backed by likely softening interest rates and the potential for good growth. Large Banks and NBFCs are seen benefiting the most from the index inclusion as the probability of lower longer-term G-sec yields would mean more foreign investors finding the Indian bond market favorable like that of corporate bonds, the report said.

Reference used: https://www.bloomberg.com/news/articles/2023-09-25/global-bond-index-inclusion-by-jpmorgan-may-draw-40-billion-flows-to-india

Cover image reference: https://img.freepik.com/free-photo/man-s-hands-close-up-holding-cup-coffee-newspaper_158595-3733.jpg