These bonds will carry 10% weight in the index by March 2025.
India will be included in the Bloomberg Emerging Market (EM) Local Monetary Government Index in stages starting January 31, 2025.
These index inclusions are expected to attract nearly $35 billion. For foreign investments, it costs £3 lakh.
A June 19 Reuters report shows foreign investors have already purchased more than $10 billion in Indian government bonds, raising ownership to record highs.
Also Read: India sets 10 years of $2 billion bond inflow jpmorgan index inclusion Day
This inflow is seen by experts like Kenneth Akintewe, Abrdn’s Asian Sovereign Debt Director.
“We see a pick-up of the flow,” Akintewe says. It says that increasing foreign presence will result in stability and reduce capital costs.
This is what experts believe is likely to lead to cheap borrowings for the government and businesses and ease interest rates.
It could also boost Indian rupee due to increased demand.
As more money enters the bond market, the rupee can see gratitude and stabilization, making Indian bonds more attractive to global investors.
So how accurately does bonds to India’s global index affect the rupee?
When Indian bonds are included in the global index, they attract more investors from around the world.
An increase in demand means that more people are buying Indian bonds in many cases in foreign currency.
To buy these bonds, investors convert the currency into Indian rupee, increasing demand for rupee.
This will strengthen the rupee and bring more money to India.
However, as Akintewe noted, the stability of the rupee is important for foreign investors when considering investing in the Indian market, as potential currency risks can negate high yields.
“Investors from a variety of currencies, such as the Singapore Dollar and the Euro, are making profits, especially as stable rupees can lead to currencies increase in addition to bond yields,” he said.
Supported by the substantial reserves of the Reserve Bank of India, India’s strong foundations, including cash shortages and solid foreign investment, have well placed the rupee for stability rather than rapid evaluation, Akintewe added.
On June 27, the rupee jumped 13 paise and closed against the US dollar at 83.44.
And what about the cost of capital, bond yields, and interest rates?
Increasing demand for bonds in India could raise the prices of bonds and lower yields.
This means that the overall cost of borrowing money (cost of capital) could be reduced as more money is available for investments at a potentially lower fee.
This will reduce borrowing for businesses and governments, increasing investment and economic growth.
With more funds available for lending, increasing liquidity also puts downward pressure on interest rates.
“We (India) usually support FDI (foreign direct investment), and we thought FPI (foreign portfolio investment) was fair and that it was a “bad thing” for FPI to flow into bonds. City India’s chief economist Samilan Chakraborty said that in order to fund this savings investment gap, it would be technically necessary to consider low interest rates to close this savings investment gap. It should technically mean it.
The gap in savings investment refers to the difference between the amount the country saves and the amount of investment (capital expenditure). If the country invests more than it saves, it will need to attract foreign capital to fill this gap.
India remains a capital shortage. That means you have more investments than savings.
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