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Informist, Saturday, Aug. 1, 2026

 

By Aaryan Khanna

 

NEW DELHI – Bloomberg Index Services Ltd.'s announcement Friday that it would defer the inclusion of Indian government bonds in its flagship Global Aggregate Index came as a bolt from the blue for bond traders. While this is the second time India's bond market failed to prove its credentials, market participants expect the country's turn at the big boys' table to come in another six months. In the interim, however, the deferment will lead to higher bond yields.

 

Most traders had expected India would be included in the global benchmark after what seemed like a big push by the authorities to secure a spot and attract over $20 billion of inflows into sovereign debt. The government scrapped capital gains and withholding tax on foreign portfolio investment in government securities in June while the Reserve Bank of India expanded the Fully Accessible Route by adding back longer tenure bonds.

 

Taken together, India had made meaningful progress towards meeting the standards expected for inclusion, but it requires more time for positive developments to be firmly established in day-to-day trade, the index provider said. It noted that the changes had reduced operational complexity and improved settlement efficiency but not enough for varied investors across the globe who track the index. Bloomberg said it would continue to review the progress of India's market access and engage with stakeholders.

 

"There could be some FPI outflows in the near term as there was an expectation that IGBs (Indian government bonds) would be included in the Bloomberg index in this cycle," said Shailendra Jhingan, head of treasury at ICICI Bank. "At the same time, we are hopeful that the deferment is temporary and that the announcement for inclusion should come within the next three to six months."

 

Following the tax reforms and RBI measures in June, FPI holdings of India's index-eligible bonds have zoomed by INR 445 billion, in part due to the addition of the 15-year, 30-year, and 40-year benchmark gilts. This is about 3% of the total amount the government will borrow in the current financial year. Inflows into India's debt markets in June and July have totalled $7.6 billion, with some going to corporate debt and to derivative instruments. Bloomberg had begun consultations with investors on India's inclusion last year but said in January it would keep the review open and ongoing, with an update by mid-2026. This had stoked purchases from both offshore and domestic investors in anticipation of inflows taking prices up.

 

The bleed in the market is expected to start immediately. Bond traders said the 10-year benchmark gilt's yield may rise to as high as 6.95% Monday, a seven-week high, from 6.83% Friday. What may help is that traders had unwound a significant portion of their bets after waiting for the index announcement for over a month. Moreover, inflows from passive investors were only expected to begin in the financial year 2027-28 (Apr-Mar).

 

At the same time, the announcement comes on the heels of the INR 340-billion auction of the 10-year benchmark 6.94%, 2036 gilt Friday, potentially exacerbating the negative reaction from traders with heavy portfolios. Most importantly, the decision may keep the 10-year yield above 6.75% even if currently high crude oil prices ease, dealers said. 

 

"Bloomberg's decision to defer the inclusion of India's bonds in the Global Aggregate Index may lead to some near-term market adjustment, with yields potentially moving by around 5–7 basis points on Monday as investors assess the development," said Sameer Karyatt, managing director and head of trading at DBS Bank India. "That said, the market is well positioned to absorb the impact over time, supported by liquidity arising from expected inflows under the RBI's FCNR scheme over the coming months."

 

Karyatt expects the inclusion "sooner" rather than later. Some dealers pointed to the Global Aggregate Index's semi-annual review in September as the next potential venue for the inclusion to be announced. One of the key focus areas would be if the RBI pursues the listing of India's government bonds on Euroclear, dealers said. Bloomberg Index Services cited the difficulty in accessing automated trading capabilities across all major investor regions despite the linking of India's bond trading platform with global players such as MarketAxess in 2026.

 

STEEPER CURVE

A partial bandage to the wound is already in place. India is expected to continue attracting foreign capital through the three- to five-year foreign currency non-resident (banks) deposits, helped by the RBI bearing the entire cost of hedging these deposits for the currency risk. Deposit rate caps have been removed and the central bank has allowed leverage to mobilise foreign currency deposits, which has led to healthy inflows in recent weeks.

 

In the month and a half since the launch of the scheme, it had attracted almost $37 billion in inflows, per the latest data from the RBI. If this pace of inflows continues till the scheme ends Sept. 30, the total collections could be over $100 billion, smashing through initial estimates which were half this number. 

 

Though some of the inflows will be used to retire high-cost liabilities and for loans, banks would at least temporarily have to park the spillover in safe assets such as government bonds, dealers said. Banks' asset-liability management teams have already targetted benchmark bonds maturing in three and five years to park the inflows. The spread of the 10-year gilt yield over the five-year benchmark 6.36%, 2031 bond widened by 5 bps in July to 38 bps and is only expected to rise further by September.

 

"Bloomberg's decision to defer the inclusion of Indian government bonds in its Global Aggregate Index is a negative development for both bonds and the currency in the near term," Abhishek Bisen, head of fixed income, Kotak Mahindra Asset Management Co. Ltd., said. "...while FCNR flows should keep the front end of the curve anchored, this development is likely to impact the 10-year, 15-year, and 40-year segments adversely."

 

The latter segments have benefitted from increased FPI interest since June and may be dumped by traders who had expected the announcement to be positive. With the Bloomberg Global Aggregate Index out of the picture and uncertainty on when the next update would come, some traders are worried that foreign inflows would stop abruptly and allow long-term bond yields to shoot up after the special FCNR scheme ends in September. Traders fear the 10-year yield could rise to as high as 7.30% by March if India's inclusion is not announced.

 

The government will also miss the FPI support in a year where the Reserve Bank of India is not widely expected to buy bonds, as it did in FY26, dealers said. Supply pressures are also seen higher than usual after September. The Centre aims to borrow only 51% of its full-year target in Apr-Sept, down from 54% last year.

 

"It's a significant setback but should not impact the markets immediately," the head of trading at a private-sector bank said. "The investor base from Bloomberg would have been more keen to invest near 6.90% or 7.00% (on the 10-year benchmark gilt) rather than 6.70%. It is at those levels now that the market will miss those consistent inflows, where yields can now trend higher once FCNR inflows end."

 

Though Bloomberg has not shut the door on Indian bonds in its flagship index, the wait may open the door for India's gilt yields to hit fresh highs this financial year. As usual, domestic banks will have to make the best of the situation as FPIs continue to cold-shoulder Indian bonds.  End

 

US$1 = INR 95.38

 

Edited by Rajeev Pai

 

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