As bond indices slowly add Indian debt, oversight is stepped up
With Indian government bonds gradually entering prominent emerging market indices, regulators have grown more watchful of unchecked capital flows into long-dated paper. After over a month of local bonds debuting in a major index, authorities excluded the longest maturities from an unlimited investment program.
The phased inclusion of local debt in equity benchmarks will likely draw around $20-25 billion globally over the coming quarters. While such foreign exchange reserves and currency support are welcomed, inflation impacts require careful policy steering. Newly issued 14-year and 30-year bonds will no longer accept non-restricted cash under the program designed for maximum accessibility.
Sources indicate this prudent move aims to balance debt management with ample capital openness, rather than discouraging investment. Only a small fraction of total local debt currently includes overseas holdings. Past currency volatility underscores the need for oversight as foreign ownership increases gradually. Global experience shows dollar outflows pose risks during downturns.
Authorities stress no policy reversal, emphasizing all pre-existing bonds remain fully open and approvals stay swift for future inflows. The economy sees rosy growth and reserves remain robust, yet monetary policy flexibility must safeguard against imported price pressures as central bank actions offset dollar buying. With staggered additions through 2025, continued monitoring will complement the rewards of growing internationalization.
