Bloomberg is going to add India Fully Accessible Route (FAR) bonds to Bloomberg Emerging Market (EM) Local Currency Government Index and related indices. The inclusion will be phased in over a 10-month period, starting from January 31, 2025.
Bloomberg’s decision comes around six months after JPMorgan included Indian bonds to its Emerging Market benchmark.
As an investor, you might be wondering what is there for you in the news of inclusion of Indian bonds in Bloomberg index. Let’s explore.
The inclusion of Indian bonds in Bloomberg and JPMorgan EM indices is expected to result in a rush of foreign flows into India. The rush of foreign flows and inclusion of Indian bonds are expected to have multiple effects. Here are some expectations:
- It may attract new investors looking to diversify
- Boost confidence of global investors into Indian bonds
- Incoming funds may help put a cap on treasury yields.
- Even when local credit demand grows or the government start borrowing more, there would be no pressure on yields to rise.
- Increased international funds’ flow into India may help the rupee appreciate as the demand for INR will also likely increase.
- However, if too many dollars flow in, it may lead to appreciation in rupee, making the imports expensive and causing domestic inflation.
But, how will foreign funds’ inflow increase?
As Bloomberg Index Services’ Nick Gendron says, “this development will increase access to, and participation in, Indian markets.” But this is not enough to understand why will more money come into India? Right?
Well, let me help you understand with an example of index funds.
In an index mutual fund, money is allocated only to stocks that are part of the index or the benchmark. Moreover, the allocation of funds to each stock is in the proportion equal to its weightage in the index. Whenever, the weight of any stock in the index changes, or any new stock gets added to the index, all index funds tracking it adjust their portfolio to reflect the change.
Also Read: India Joins JP Morgan’s Bond Index: What It Means for Investors and the Economy
Following the inclusion of Indian bonds to Bloomberg Index, all index funds tracking it will adjust their portfolios to reflect the change. For this to happen, they will buy Indian Government securities, leading to an inflow of more foreign funds into India.
But, how much money can flow into India?
As of now, Bloomberg Bond Index is valued at around $3 trillion. It is expected that India may have a weightage of around 0.6-0.8% in the index, which amounts to around $10-15 billion heading towards Indian treasuries, according to this report.
Another estimate suggest that Bloomberg Bond Index inclusion may attract an investment exceeding $5 billion. This is on top of $20-30 billion expected from JP Morgan index inclusion.
It is further expected that funds may also flow from actively managed funds benchmarked against the Bloomberg index.
How will the inclusion happen?
According a press release by Bloomberg, Indian FAR bonds will be included in 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 by 10% of their full market value every month over the 10-monnth period ending in October 2025.
By October 2025, Indian FAR bonds in the index will be weighed at their full market value in the indices.
The indices that will include Indian FAR bonds are Bloomberg EM Local Currency Government Index, the Bloomberg EM Local Currency Government Index 10% Country Capped Index, and all related sub-indices.
