What does the entry of Indian government bonds into FTSE Russel’s index mean for India?

The news

On 8th October, FTSE Russell (one of the prominent index providers in the world) announced that it will include Indian Government Bonds in its Emerging Markets Government Bond Index (EMGBI).

It would attract a significant foreign investment, potentially around $4 billion, into India’s bond market.

What is a Government Bond Index?

An Index is a group of investible instruments like stocks or bonds representing a market or a particular segment of it. Take the Nifty 50, it represents the Indian Stock Market. You can not track every stock, so you look at the Nifty 50 to gauge how the Indian Stock Market has performed.

So FTSE Emerging Markets Government Bond Index (EMGBI) is an index for bonds issued by the governments of emerging countries such as China, Indonesia, Brazil, South Africa, etc. Bond investors, rather than investing in the bonds of each of these countries separately, can invest in this Index itself.

Going forward, in November of next year the Indian Government Bonds too will be a part of the FTSE EMGBI, representing 9.35% of the index.

In June this year, JP Morgan also added Indian Bonds to one of its indexes and it is expected to attract about $25 Billion in inflows from foreign investors.

What would change?

1. Greater global recognition
Indian Government Bonds would be in the limelight of foreign investors seeking better returns. The silver lining is that if JP Morgan & FTSE are doing it, its likes might follow.

2. Lower cost of borrowing
If more people are willing to lend you, your ability to bargain lower interest rates increases. If a country can borrow money at cheaper rates, the cost of capital reduces, and economic growth accelerates.

To conclude

It would make it easier for the government to raise funds and finance various projects. It could translate into a more economically stable environment, facilitating expansion and ultimately wealth creation.

In simpler terms: Debt brings in the money, and equity puts it to work.