Bloomberg Defers India Bond Index Inclusion, Disappointing Hopes

Bloomberg Index Services Ltd has held off adding Indian government bonds to its global aggregate index, a decision that dealers said would trigger a selloff in local debt on Monday.

“Many market participants would like to see these enhancements become more firmly established in day-to-day market practice before a decision is made on index inclusion,” the index provider said in a statement. It cited recent efforts by Indian authorities to improve market access, including the removal of withholding and capital gains taxes on foreign investors in government bonds.

BISL said it would continue to engage with market participants and provide a further update as the review progresses.

The deferral comes after a sustained push by New Delhi to attract foreign capital. Overseas investors have poured $5 billion into index-eligible bonds since the tax cut was announced on June 5, with the numbers boosted by the addition of some new securities to the eligible category.

“A selloff of around 5-10 basis points can be expected in the bond market on Monday because a lot was riding on the index inclusion and those hopes have been belied,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. “The swap market could be affected too.”

Benchmark 10-year yields closed three basis points higher at 6.84% on Friday. Yields are up nine basis points in July after dropping the most in six years in the previous month.

BISL said the Indian government bond market continues to make meaningful progress toward meeting the standards expected for inclusion. “Given the significance of recent market enhancements and the importance of ensuring they are fully reflected in day-to-day market practice, BISL believes additional time is warranted for these developments to become more firmly established before making a decision,” it said.

Even as automated trading capabilities in India’s bond market expand, index respondents noted that implementation has not yet been fully completed across all major investor regions, BISL said. Some respondents also said they wanted to see further evidence that recent market reforms translate into more efficient operational workflows, including improvements to account opening and processes for adding foreign investors.

India is already part of JPMorgan Chase & Co’s flagship emerging market bond index. It has also been added to Bloomberg’s and FTSE Russell’s emerging-market gauges. The deferral on the broader global aggregate index leaves a gap in the country’s integration into global debt benchmarks.

Local bonds have been vulnerable to swings in oil prices, with India importing more than two-thirds of its crude requirements. Brent crude surged past $120 a barrel in late April before easing on a peace deal between the US and Iran. A resumption of hostilities has seen energy prices rise again.

Bloomberg LP, which offers index products for various asset classes through BISL, is also the parent company of Bloomberg News. The company’s decision to delay the inclusion reflects the tension between offering market access and ensuring that structural reforms are solid enough to support daily trading volumes.

For traders, the immediate question is where the selloff settles. Pawar expects a 5-10 basis point move on Monday. The size of the foreign flows that had been betting on inclusion – $5 billion since June – means any reversal of those positions could amplify the move. The swap market, which prices in future rate expectations, will also need to absorb the disappointment.

The broader read-through for Indian debt is that the path to full global index inclusion is slower than many had hoped. The country’s bond market remains relatively sheltered, and foreign ownership is still a fraction of what it is in other emerging markets. The delay does not close the door, but it pushes the timeline further out. BISL said it will give a further update as the review progresses. No date was set.