India bond index inclusion could funnel $25 billion into debt: Dalal

The Reserve Bank of India removed restrictions on foreign investment in securities with residual maturity beyond five years, effective April 2024. It also consolidated sub-limits for government bonds, state loans, and corporate debt into a single category. The changes, together with global index inclusion, could channel as much as $25 billion into Indian debt, said Dhawal Dalal of Edelweiss Mutual Fund.

Index inclusion is the bigger driver. JPMorgan Chase announced in September that Indian government bonds would enter its emerging-market benchmark starting June 2024, with a phased weight reaching 10%. Bloomberg Index Services followed in March, planning inclusion in its EM local currency index from January 2025. Passive fund flows between the two could total $20-25 billion over 12-18 months, Dalal said.

Lower borrowing costs are the most direct consequence. A 10-basis-point drop in the 10-year yield cuts the government's annual interest expense by roughly ₹5,500 crore, based on the outstanding stock of dated securities. Banks hold about 40% of sovereign debt. They would record mark-to-market gains on bond portfolios. If deposit costs do not rise correspondingly, net interest margins would widen.

HDFC Bank is among the best-placed lenders. Its held-to-maturity portfolio totals roughly ₹4.6 lakh crore. A sustained yield decline would lift book value and shrink unrealized losses. The stock carries an Alpha Score of 40 out of 100, rated Mixed. Some of the index-inclusion optimism is already in the price, traders said. HDB stock page

For technology companies, the read-through is more nuanced. Infosys and Wipro invoice predominantly in dollars. A stronger rupee would weigh on margins. A compression in bond yields can reduce the equity risk premium, raising valuations across sectors. Dalal noted that the reforms reinforce India's fiscal credibility, which could attract equity flows as well. INFY has an Alpha Score of 57, rated Moderate. WIT scores 46, rated Mixed. INFY stock page WIT stock page

The timeline matters more than the headline number. The JPMorgan inclusion starts with a 1% weight at the June 2024 month-end rebalancing, rising by 1% each month for 10 months. That gradual ramp gives foreign investors a predictable schedule for deployment. Bloomberg's index addition follows in January 2025 with a similar phased approach.

Risks remain. If U.S. Treasury yields push higher or the rupee depreciates sharply, global fund flows could slow. The RBI's own intervention in the foreign exchange market has kept the rupee steady against a strong dollar. Bond inflows would reduce the need for such defense over time.

Foreign investors bought ₹12,000 crore of Indian equities in April, on track for the highest monthly inflows this year. Debt inflows have a more direct impact on yields and banking stocks. The first concrete test will be the June rebalancing, where index funds will need to buy a significant amount of bonds to match the new weight.