What are the main drivers of Indian bonds’ rising share in global bond indices? And what are the key drivers of Indian bonds for investors?
The liberalization of the Indian bond market
Domestic investors have historically dominated India’s bond market. Foreign investors could access the market through a quota system that effectively served as a cap on access. In 2020, however, Indian regulators began classifying certain government bonds as fully accessible route (FAR) securities. After that, licensed foreign investors could trade FAR bonds without quotas.
Indian bonds' accessibility continued to grow, reaching $300 billion by the end of 2023. This made them increasingly eligible for inclusion in leading global bond indices. Indeed, the bonds were included in JP Morgan’s GBI-EM Index in June 2024. Markets expect India’s weighting in this index to reach 10% by March 2025.
Potential investment benefits of Indian bonds
Index providers have responded positively to these liberalization measures.
Attractive structural features
There are several attractive structural features that boost the attractiveness of Indian bonds. The Indian government bond market is vast, with assets of $1.3 trillion. It trades with tight bid-offer spreads of only 1–3 basis points, indicating good liquidity. Additionally, the bonds of various state governments amount to $500 billion, while the corporate bond market is worth a further $500 billion.
Indian bond market volatility is also historically low, at 5%, and the rupee has been one of the least volatile currencies globally in recent years.
Diversification/low correlation to other markets
Domestic Indian government bonds offer good diversification thanks to their historically low correlation with other global assets. This is mainly attributed to the minimal level of foreign ownership. As of April 2024, foreign holdings of Indian government bonds were less than 3% of the US$1.3 trillion domestic market and less than 2% of the overall market. Post-index inclusion, foreign ownership is only expected to rise to just under 4%.1
Meanwhile, India’s corporate bond market is chiefly driven by companies that predominantly focus on domestic customers. This, along with India’s relatively limited global trade integration, often lessens Indian bonds’ correlation to other global asset markets.
Defensive benefits in more challenging market environments
Another factor is Indian bonds’ relatively better performance in more challenging market environments. For example, from the end of 2019 to the peak of the market sell-off during the COVID crisis in March 2020, India’s domestic bond market was down only 3% (including the impact of FX). This performance significantly outpaced many other asset classes (Chart 1).
Chart 1. Selected asset class performance during pandemic period
Source: abrdn Investments, Bloomberg. Note: Cumulative returns as of December 2019 to March 2020.
Positive structural reform story
Over the past decade, the government has enacted important reforms, putting India on a more stable economic footing. In particular, the 2017 goods & services tax and reduced subsidies have strengthened the government’s fiscal position.
They have also helped limit the need for new bond issuance. On the corporate side, the acceleration of digitalization has made companies more efficient, driving profitability.
Looking ahead, with the political continuity secured by the recent elections, India's economic policy is expected to remain pro-business and investor friendly.
Final thoughts
We believe Indian bond valuations offer a compelling opportunity, particularly for income-orientated investors. Indeed, they are one of the few global investment-grade asset classes offering yields of around 7%.[2] The real yield picture is also improving. In July 2024, consumer price inflation fell to 3.6% year-on-year – below the central bank’s target rate of 4% and the lowest since August 2019. As a result, markets anticipate that the central bank will soon start a new rate-cutting cycle, which would likely boost the capital returns from Indian bonds.
1 J.P. Morgan, as of April 30, 2024.
2 J.P. Morgan’s Government Bond Index-Emerging Markets (GBI-EM) Index, November 2024.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Diversification does not ensure a profit or protect against a loss in a declining market.
AA-311024-185232-1