Leading to the inflow of billions of dollars into India, Bloomberg Index Services has decided to include Indian bonds in the Bloomberg Emerging Market Local Currency Index and related indices in a phased manner from January 31, 2025.
“Indian FAR bonds will be included in the Bloomberg EM Local Currency Government indices with an initial weight of 10% of their full market value on January 31, 2025. The weight of FAR bonds will be increased in increments of 10% of their full market value every month over the ten-month period ending in October 2025, at which point they will be weighted at their full market value in the indices,” Bloomberg said in a statement.
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.
Bloomberg Indices will create an ex-India version of the EM Local Currency Government Index and can also create other standard and custom versions of the index.
“The Indian economy is on a steady growth trajectory and inclusion of Indian FAR Bonds in our Emerging Market Local Currency Government Index marks a key milestone amidst the measures India has taken to open its bond markets,” said Nick Gendron, Global Head of Fixed Income Index Product, Bloomberg Index Services Limited (BISL).
Bloomberg founder Michael R. Bloomberg said this is an important marker in the development of India’s financial markets and a reflection of India’s growing importance to the global economy.
Once completely phased into the Bloomberg Emerging Market 10% Country Capped Index, India is expected to join both China and South Korea as markets that reach the 10% cap. Within the market cap-weighted version of the index, India is expected to be the third largest country after China and South Korea. Using data as of January 31, 2024, the index would include 34 Indian securities and represent 7.26% of a $6.18 trillion index on a market value-weighted basis.
The inclusion of Indian bonds in the Bloomberg EM index could bring inflows of $5 billion from passive investors and more likely from active investors.
Last year, JPMorgan announced the inclusion of Indian sovereign bonds in its emerging markets index with a maximum weightage of 10% starting June 2024, which is estimated to bring inflows of $20-30 billion.
FTSE remains the last bastion for India to conquer in the global bond index universe. Last year, global index provider FTSE Russell had decided against the inclusion.
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Although India’s bond market is the third-largest after China among emerging markets with a market capitalisation of more than $1.2 trillion, nearly triple Indonesia’s and almost similar to Brazil’s, FII ownership of Indian government securities is significantly lower than EM peers at 2-3%.
In the 2020 Budget, Finance Minister Nirmala Sitharaman allowed FIIs to invest in certain government bonds without restrictions by introducing a Fully Accessible Route (FAR). About 35% of outstanding government securities are FAR bonds and, incrementally, 75-80% of new issuances are FAR bonds. At present, 23 FAR bonds with a combined value of $330 billion are eligible for inclusion in the index.
The Indian rupee also stands to gain from the move due to a big dollar inflow due to the buying of government securities.
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