Inclusion in Global Indices to Bring USD 40 bn Foreign and Equivalent Domestic Capital
HYDERABAD: India’s inclusion in the JP Morgan Global EM Bond Index and Bloomberg EM Local Currency Government indices will see annual foreign investment of $30-$40 billion over the next five years and free up equivalent amount of domestic capital investment by the private sector, finds the World Bank.
By 2023-end JP Morgan announced India’s inclusion in its Global EM Bond and in March 2024, Bloomberg made its own announcement of India’s inclusion into its EM Local Currency Government indices.
From June 2024, Indian government bonds will gradually climb the index ladder, reaching a 10 per cent share of the JP Morgan index by March 2025. For the Bloomberg index, a similar process will start in January 2025 and go on until October 2025.
Moving ahead, it is expected that India will enter other major indices, such as the FTSE, which is six times larger.
So far, India has mainly relied on domestic funding by the public sector to finance large initiatives, making borrowing more expensive, particularly for ambitious infrastructure projects - even more so for eco-friendly efforts to combat climate change.
Now that more government bonds can be bought by foreign investors, a larger share of domestic financial resources will be available for investment in avenues beyond Government Securities (G-Secs). Over the next five years, experts predict an annual wave of foreign investment of $30-40 billion, freeing up an equivalent amount of domestic capital for investment by the private sector.
The inclusion means that there is a broad consensus amongst foreign investors that the country has reached sufficient financial stability and that there is an appetite to include Indian Government Securities (G-Secs) in global investments portfolios.
Further, it typically lowers borrowing costs for the government, and ultimately for Indian firms. Because when demand for a country's bonds goes up and supply remains limited, yields reduce.
With a larger share of G-Secs being held by foreign investors, domestic institutional investors will look for other avenues to invest their capital, with the extra pool of money available in the market being used to address long-term financing gaps such as in infrastructure and climate finance, where the needs are daunting.
However, to fully benefit from these changing dynamics, India will need to address other challenges simultaneously, such as improving project preparation, creating a pipeline of bankable projects, upgrading implementation capacity and more.