India bonds in Bloomberg EM bond indices may bring $2-3 billion inflows, say experts

FPI inflows

The Indian bond market is likely to receive inflows of $2 billion to $3 billion from foreign investors after the inclusion of Indian bonds in the Bloomberg Bond Index., experts said.

Bloomberg Index Services (BISL) on March 5 said it will add India Fully Accessible Route (FAR) bonds to the Bloomberg Emerging Market (EM) Local Currency Index from January 31, 2025.

FAR securities are the bonds which global indices consider eligible for inclusion. Foreign investors do not have any limits for investment.

Experts said that the expected inflows are lower than the likely inflows from the JP Morgan Bond Index due to the small index size.

“This is a smaller index and is expected to generate inflows of $2 billion to $3 billion to India,” said Gaura Sengupta, economist at, IDFC First Bank.

A dealer with a foreign bank said there could only be $1-$2 billion inflows through this index.

On January 8, BISL opened a consultation to get feedback on the proposed inclusion of the India FAR bonds in the Bloomberg EM Local Currency Index.

BISL decided to include India FAR bonds in the Bloomberg EM Local Currency Government Index and all related indices based on the feedback during the consultation.

Prior to this, last year, JP Morgan said it would include Indian government bonds in its widely tracked emerging market index starting June 28, 2024.

About $23.6 billion of inflows from foreign portfolio investors are expected from July 2024 to May 2025, experts said.

Further, Swati Arora, Senior Economist at HDFC Bank said foreign debt inflows are likely to support the USD/INR pair. That said, we expect that RBI intervention could limit could limit the gains in the rupee against the dollar as the central bank could absorb the foreign inflows.

Also read: MC Explains | What being part of Bloomberg Bond Index means for India and investors

Securities to be added

The weight of India FAR bonds will be increased in increments of 10 percent of their full market value every month over the 10-month period ending in October 2025, at which point they will be weighted at their full market value (100 percent) in the indices.

As of January 31, 2024, there were 34 Indian FAR bonds that would be eligible for the EM Local Currency Government Index, and the  other indices.

The local currency India bonds will comprise INR denominated India government bonds which are placed through the FAR. The bonds must have a minimum amount outstanding of Rs 10 billion and follow the general rules of the Emerging Market Local Currency Index such as requiring bonds to have a minimum maturity of one year, BISL said.

Also read: After JPMorgan, Indian govt bonds could become part of Bloomberg indices in 2024

Increased FPI’s FAR holdings

Investment by foreign portfolio investors (FPI) in Indian government securities through the FAR rose over 100 percent since start of this fiscal till March 5.

In absolute terms, FAR holdings of FPIs stood at Rs 1.68 lakh crore on March 5, 2024, compared to Rs 77,441.358 crore on April 3, per Clearing Corporation of India Ltd data.

The investment by foreign investors has increased in the last few months, especially after the announcement of Indian bond inclusion in JP Morgan Bond Index.

This is because most FAR securities are eligible for inclusion in the index.