Opinion | Indian bonds could well be the toast of global investors

The current low-to-negative interest rate environment around the world is making Indian bonds an even more attractive option for certain investors. India has an active and open financial market. The country’s stock market is among the 10 largest in the world, and its fixed income market is the fourth largest among emerging economies. However, cultivating a stronger bond market to help underwrite the burgeoning economy is necessary if India is to reach its bold ambition of becoming a $5 trillion economy by 2024, and, according to Bloomberg Economics’ base-case estimates, $8.4 trillion by 2030. If it can do so, India’s economy could be the third largest by 2026, behind only China and the US.

India’s future inclusion in benchmark indices could significantly deepen India’s bond market and attract global investors, who are playing an increasingly important role in shaping foreign portfolio allocation flows into growing economies. Continued financial market reforms will be critical to success. The easing of controls on foreign investments into the bond market would open new avenues for capital flows as India increases its issuance of government debt to fuel its economy. The government is looking to increase public investment to ₹100 trillion over the next five years from ₹35 trillion over the last five. In addition, the issuance of foreign currency debt and removal of restrictions on bond investments—including caps and capital controls that are roadblocks for global investors—would help address concerns over the ease of access to India’s financial markets.

For global investors, a more internationalized debt capital market would deliver greater pricing transparency, stronger governance in assessment of opportunities and more efficient capital allocation. Index inclusion would also be a strong signal that India’s bond market is open for business.

For Indian bonds to be included in some of the most important global indices, many of which are tracked by trillions of dollars of benchmark-driven assets under management, India’s local currency debt market must be classified as investment grade. The currency must be freely tradable, convertible, hedgeable and free of capital controls.

China’s recent inclusion in the Bloomberg Barclays Global Aggregate Index could hold guidepoints for India in achieving similar index inclusion. China’s bond market accessibility was first discussed at Bloomberg’s Index Advisory Council meetings in 2016. The following year, we updated inclusion rules for the Bloomberg Barclays China Aggregate Index and launched two global indices that included China as a forerunner to future full inclusion. As of April, Chinese bonds are being phased into the aforementioned index over a period of 20 months. So far, with the inclusion of only Chinese government and policy bank securities in the index, the amount of Chinese bonds held by overseas institutions reached a historic high of RMB 2.02 trillion as of July. Goldman Sachs predicts that China’s inclusion in global benchmark indices will attract more than $1 trillion of capital inflows to China’s bond market over the next decade. Once fully phased in, Chinese bonds in the index are expected to make up about 6% of the index overall. That would make these Chinese bonds the fourth largest currency component of the index after the dollar, euro and Japanese yen.

Some of the core initial conditions to support index inclusion are already in place in India. These include a rules-based monetary and fiscal policy framework, manageable levels of external debt, a flexible exchange rate and adequate levels of forex reserves.

Implementing the further required elements may take time and political will, but it’s worth remembering that China’s journey to index inclusion took three years. On these too, China holds some relevant insights for India’s own moves, notwithstanding the differences in the financial, political and regulatory dynamics of the two markets.

Firstly, regular communication between international investors and India’s regulators, government and economic architects is crucial. Engagement on the ease of access to India’s bond market will be a core part of the governance process for index providers and investors alike. Index providers such as Bloomberg can play a proactive role in facilitating that engagement.

Secondly, concrete steps to reform India’s financial markets will need to be undertaken systematically and over time to meet index inclusion rules. For example, quotas, caps and other restrictions on bond investments will need to be removed or eased in a planned and transparent way.

Thirdly, resolving the operational requirements of investors is critical. Successful index inclusion requires the coordination of many market players and regulators. Taxation laws need to be clear, global custodians must be able to support market participants, and rating agencies need to establish their presence to support the eventual inclusion of corporate bonds.

A well-functioning, internationally accessible bond market thrives on transparency. Attracting global investors through a clear, time-bound and well sequenced series of reforms and easing of restrictions can be a key lever in India achieving its bold economic vision and targets. It’s time to turn the dream into a near-time reality and unlock new financing opportunities for India’s bond market.

Steve Berkley is global head of Bloomberg Indices