India’s bond index inclusion may draw $250 bn inflows

MUMBAI: India’s likely inclusion in global bond indices is likely to draw as much as $250 billion of inflows over the next decade pushing up the Indian Rupee in real terms and reduce the cost of borrowing by as much as 50 basis points for the government, forecasts Morgan Stanley.

The government’s desire to be included in global indices shows its ambition to raise the economic growth rate and that would lower borrowing costs, it said. The move should also help India keep investment grade credit rating from global rating companies despite higher borrowing. The ratio of fiscal deficit to gross domestic product is also set to slide over the years, the investment bank said.

“We expect India to be included in global bond indices in early 2022,” Morgan Stanley said in a report. “This would have profound implications for the economy, FX, bond yields and equity markets. The opening up indicates policy-makers’ desire to push growth rates higher through investment.”


The index inclusion will likely attract US$170/250 billion in bond inflows in the next decade in our base and bull case scenario, it said.

India has been reluctant to open up its bond markets even though it threw open the equity markets in the early 90s. The successive administrations believed that high fiscal deficit and the current account deficit could make the financial markets unstable if global investors are permitted to own fixed income securities. But the last few years has been different with improved macroeconomic position and slowing of inflation.

“We see banks benefiting from stronger growth and lower borrowing costs; private banks, particularly large ones, should be key beneficiaries,” it said.


Among non-bank financials, potential beneficiaries are likely to be HDFC Ltd., , SBI Cards, Mahindra Finance and Cholamandalam Finance.

Foreign ownership of Indian government bonds has been declining but 2022 would be the turning point that could bring an acceleration of bond inflows. Expected foreign inflows could flatten the sovereign bonds curve by 50 basis points lowering the overall funding costs.

The benchmark bond yield could drop as much 35 basis points from the current levels.


Foreign portfolio investors invested a net of over $2 billion since August turning the trend of net selling after many months, show data from NSDL, a depository.

The opening up of the sovereign bond market and resultant inflows should bring good news for Indian equity returns due to a positive impact on growth and likely implications for softening interest rates.

Due to inflows the rupee could rise by 2 percent per year in REER (Real Effective Exchange Rate) terms.


“Foreign inflows should lead to a lower borrowing cost, which helps debt sustainability, as it is important for India to keep an investment grade rating,” it said.

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