India bond index inclusion delayed by Bloomberg over infra issues

Bloomberg Index Services has deferred the inclusion of Indian sovereign bonds in its Global Aggregate index, citing the need for further evaluation of the country's operational and market infrastructure. The benchmark tracks more than $70 trillion of investment-grade debt and is closely followed by long-duration asset managers globally.

The index provider specified the precise bottlenecks holding back Indian debt. “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,” BISL said.

The delay threatens to reverse the recent rally in Indian government bonds. Yields on the 10-year benchmark closed at 6.83% on Friday, up two basis points from the previous session, with dealers anticipating a further rise to 6.90% on Monday.

The expected reversal stems directly from the market pricing in the index addition over recent months. “The market was running on expectations that Indian government bonds will be included in the Bloomberg index,” said Vijay Sharma, senior executive vice-president, PNB Gilts. “Since this has not happened, the markets could witness a sell off by 8-10 basis points.”

Those expectations were fueled by aggressive government and central bank preparation. Authorities waived taxes on capital gains and interest income, while the Reserve Bank of India expanded the eligible investable universe for overseas funds to include bonds with maturities up to 30 years.

The anticipated inflows were substantial. Analysts had conservatively estimated $10 billion to $15 billion of passive inflows during the phase-in window, with Goldman Sachs projecting $15 billion. Foreign portfolio investors responded to the broader inclusion narrative by pouring a record Rs 55,518 crore into Indian government bonds in June, driving a 26 basis point softening in the 10-year yield that month.

Indian sovereign debt is already tracked by three major emerging market indexes, with JP Morgan's addition taking effect in June 2024. However, the Global Aggregate is a fundamentally different vehicle. It caters to core funds that allocate strictly based on investment-grade benchmarks, meaning the missed inclusion denies India access to a more stable, deeper pool of global capital.

For Indian policymakers, the deferral highlights a persistent gap between financial market reforms and the back-office infrastructure required by global custodians. Until trading workflows are fully automated and post-tax settlement timelines are shortened, the country's sovereign bonds will remain locked out of the world's largest debt gauge.