No reprieve for inflows: Bloomberg defers inclusion of Indian govt bonds into global index

Over the last couple of years, Indian government debt — bonds it issues to borrow money from the market to cover its fiscal deficit, or the difference between its income and expenditure — has been added to so-called global bond indices. This began with JPMorgan adding India to its emerging market index beginning June 2024. Subsequently, Bloomberg included India in its Emerging Market Local Currency Index from January 2025 and FTSE Russell to a similar one from September 2025.

Becoming a part of these bond indices is crucial to attracting passive investment flows; several global funds track the weight a certain country has in these bond indices and invest accordingly. India’s inclusion into the JPMorgan and Bloomberg emerging market index brought in billions of dollars of foreign money into the Indian government debt market, helping lower the interest paid by the Centre on its borrowings as demand for its bonds picked up due to these foreign buyers.

Investment outflows from Indian financial markets have intensified in recent months. While the equity market saw net outflows of Rs 1.66 lakh crore in 2025 after Rs 427 crore of net inflow in 2024, money from abroad into central government bonds eligible to be part of global bond indices more than halved to Rs 55,590 crore in 2025 from Rs 1.23 lakh crore in 2024. So far in the first 12 days of 2026, foreign investors have bought Rs 3,415 crore of these eligible bonds.

Further, even though foreign direct investment (FDI) has picked up some pace, it is on the back of a very poor showing in 2024-25, when net FDI inflows into India amounted to just $959 million. In the first eight months of 2025-26, India has seen net FDI inflows of $6.2 billion, up from $3.3 billion in the same period of the last fiscal.

Weakness in foreign inflows in conjunction with a rising trade deficit due to the US’ 50 per cent tariff has put pressure on the rupee’s exchange rate, which in December fell past the 90- and 91-per-dollar marks to multiple fresh all-time lows before gaining some ground in recent weeks, with the Reserve Bank of India (RBI) intervening heavily by selling foreign currency to support the exchange rate. On Tuesday, the rupee closed at 90.19 per dollar. According to RBI data released last week, India’s foreign exchange reserves stood at $686.8 billion as on January 2, down $9.8 billion from December 26 — the biggest weekly fall since November 2024.

Meanwhile, the Indian debt market is set for a sharp rise in the supply of bonds from regional governments in the current quarter that will end in March, with states to issue a record amount of debt worth Rs 5 lakh crore to meet their expenditure. And while the RBI has pledged to keep providing liquidity to the banking system through its various instruments, bond yields declined by less than 20 basis points (bps) in 2025 even though the policy repo rate was cut by 125 bps to 5.25 per cent.

“The rise in supply comes at a time when banks demand weak and investor demand (insurance and pensions) tentative. The support from rate cut expectations will not be there as the cycle is likely over,” Gaura Sen Gupta, IDFC First Bank’s Chief Economist, said in a note last week.

In its statement on Tuesday, BISL said that as part of its consultative process on the inclusion of Indian central government bonds into its flagship global index, a number of respondents highlighted the “important operational and market-infrastructure considerations that merit further evaluation”.

“These considerations include, among others, the current lack of fully automated trading workflows, settlement and repatriation timelines associated with post-trade tax processes, and the complexity and duration of fund registration procedures. While such features are more familiar to investors in emerging market strategies — and were assessed as acceptable for inclusion in BISL’s emerging market indices — some respondents noted that the Global Aggregate Index represents a materially broader and more operationally diverse investor base,” BISL said.