Bloomberg including Indian bonds in its index- Confidence booster

Source: The post Bloomberg including Indian bonds in its index has been created, based on the article “Confidence booster: Index inclusion reflects confidence in India” published in “Business Standard” on 7th March 2024.

UPSC Syllabus Topic: GS Paper 3-Indian economy-mobilisation of resources.

News: The article discusses Bloomberg adding Indian government bonds to its index, which is expected to attract foreign investment and help India’s economy.

About inclusion of India’s government bonds to emerging market index.

Bloomberg will include Indian government bonds in its emerging market index starting January 31, 2025, over 10 months.

This follows JP Morgan’s inclusion of Indian bonds starting in June 2024.

The initial inflow from Bloomberg’s inclusion is expected to be $2-3 billion.

What is the significance of Bloomberg including Indian bonds in its index?

Boost to Indian Debt Market: Bloomberg’s inclusion of Indian bonds in its index significantly boosts the Indian debt market. (Expected to attract $2-3 billion initially)

Confidence from Global Investors: Following JP Morgan’s earlier inclusion, Bloomberg’s decision signals strong confidence from international investors in the Indian economy.

Impact on Fiscal Deficits: Helps the Indian government finance fiscal and current account deficits by bringing in foreign savings.

Stable Investment Flow: Investments from funds tracking the index are typically passive and considered more stable.

Economic Strength Indicator: Reflects confidence in India’s macroeconomic stability, highlighting its growth and substantial foreign exchange reserves.

Risk Management: Calls for agile macroeconomic management due to the increased risks associated with higher foreign exposure.

What are the risks involved in including Indian bonds in the emerging market index?

Increased Market Volatility: Higher foreign investment can lead to greater market volatility, especially during global financial stress.

Currency Fluctuations: Large foreign fund movements can cause instability in the value of the Indian rupee.

Economic Impact of Reversed Flows: As per the RBI Governor’s statement, an increase in index weighting brings inflows, but a decrease could lead to outflows, posing economic challenges.

Way forward

To manage the risks from Bloomberg’s inclusion of Indian bonds, India needs to maintain low fiscal and current account deficits, ensure stable inflation, and actively manage foreign exchange flows. The Reserve Bank of India will play a crucial role in stabilizing the currency and mitigating volatility.

Question for practice:

Examine how Bloomberg’s inclusion of Indian government bonds in its emerging market index will impact India’s economy and financial markets?