Activity

Indian issuers, both government and corporate, are increasingly active and successful in tapping international bond markets for their financing requirements. This trend is driven by several factors and notable developments:
Key Trends and Favorable Factors:
* Global Index Inclusion: A major game-changer for Indian government bonds (IGBs) has been their phased inclusion in major global bond indices.
* J.P. Morgan’s GBI-EM Index: IGBs began inclusion in June 2024, with their weightage set to increase by 1% each month until it reaches 10% by March 2025.
* Bloomberg EM Local Currency Government Index: Inclusion began in January 2025 and will continue until October 2025.
* FTSE EMGBI and AGBI: IGBs are expected to enter these indices from September 2025.
* Impact: These inclusions are projected to attract substantial foreign investment, with estimates ranging from USD 20 to 40 billion, significantly boosting demand and liquidity for Indian bonds. This also lowers borrowing costs for the government and potentially for Indian firms.
* Attractive Yields: Indian bonds, particularly government bonds, offer relatively higher yields compared to many other emerging markets, making them attractive to foreign investors seeking stable income or “carry.”
* Improved Accessibility and Liberalization: Indian regulators have progressively liberalized the bond market. The introduction of “Fully Accessible Route” (FAR) securities for government bonds in 2020 has allowed foreign investors to trade these without quotas, significantly increasing accessibility.
* Strong Economic Fundamentals and Stability: India’s robust economic growth, moderating inflation, and a relatively stable exchange rate (Rupee) contribute to investor confidence. The Reserve Bank of India’s (RBI) efforts to maintain fiscal discipline and provide FX hedging tools also enhance market appeal.
* Diversification Benefits: Indian government bonds offer good diversification benefits due to their historically low correlation with other global assets, primarily attributed to minimal foreign ownership until recently. This makes them appealing for global portfolios.
* Rebounding Corporate Issuance: After a subdued period in 2022 and 2023, India’s international bond issuance rebounded strongly in 2024, increasing by 53% year-over-year to US$13 billion. This was primarily driven by financial institutions and the materials sector. May 2025 saw foreign investment in Indian corporate bonds soar to a decade high, spurred by significant fundraises like that of the Shapoorji Pallonji group.
* Growing Sustainable Bond Segment: Sustainable bonds (green, social, and sustainability bonds) have become an important segment of Asia’s international bond markets, with India contributing significantly to this trend.
Challenges and Considerations:
* Global Market Volatility: Indian issuers remain susceptible to global market conditions, including interest rate movements in developed economies and geopolitical tensions.
* Currency Risk: While the Rupee has been relatively stable, currency fluctuations remain a factor for international investors.
* Domestic Demand vs. International: While international interest is growing, domestic demand remains a significant driver for the Indian bond market. Foreign holdings of Indian government bonds are still a small percentage, though expected to rise.
* Credit Ratings: For some smaller or lesser-known Indian corporates, achieving favorable credit ratings from international agencies can be a challenge, potentially limiting their access or increasing their borrowing costs in international markets.
* Regulatory Environment: While liberalization has occurred, continuous alignment with international best practices and clear regulatory frameworks are important for sustained international interest.
In summary, Indian issuers are indeed fairing well in tapping international bond markets. The inclusion of Indian government bonds in global indices, coupled with India’s strong economic fundamentals and attractive yields, has significantly enhanced their appeal to foreign investors. Corporate issuance is also on an upward trend, indicating increasing confidence in India’s credit market. While challenges remain, the overall outlook suggests continued growth in India’s engagement with international bond markets.

Video courtesy of Interactive Brokershome

Video courtesy of Interactive Brokers