Indian Bonds: Why Non-Inclusion in Bloomberg’s Global Bond Index Matters for Flows

Indian government bond markets saw a sharp reaction during the week after Bloomberg decided to defer the inclusion of Indian bonds in its Global Aggregate Bond Index. The impact was immediately visible in yields, even though the underlying fundamentals of the bond market remained unchanged.

The episode highlights how sensitive bond markets can be to global index-related flows and why index inclusion matters far more for capital flows than for near-term yield expectations.

What Happened in the Indian Bond Market

During the week, the yield on India’s 10-year government bond moved up sharply from 6.63% to 6.68%, a rise of 5 basis points. In bond markets, such a move over a short period is relatively uncommon and usually signals a specific trigger.

The trigger, in this case, was not inflation data, fiscal concerns, or monetary policy expectations. Instead, it was a technical reaction to Bloomberg’s decision to postpone the inclusion of Indian bonds in the Bloomberg Global Aggregate Bond Index (BGAI).

Understanding the Price–Yield Relationship

To understand why yields spiked, it is important to revisit how bond prices and yields behave.

• Bond prices and bond yields move in opposite directions.
• When bond prices fall, yields rise.
• When bond prices rise, yields fall.

Ahead of Bloomberg’s expected decision, several bond traders had built positions in Indian government bonds, anticipating index inclusion. Such inclusion typically brings predictable buying from global passive bond funds.

On 13 January, when Bloomberg announced that it was deferring the inclusion decision, these traders rushed to unwind their positions. The resulting selling pressure pushed bond prices lower. Since yields move inversely to prices, yields spiked.

This was a reactionary move driven by positioning, not a reassessment of India’s macroeconomic or fiscal outlook.

Why Bloomberg Deferred the Inclusion Decision

Before analysing the implications, it is important to clarify what the decision does and does not mean.

India is already part of several major global bond indices:

• S&P global bond indices
• JP Morgan bond indices
• FTSE bond indices

Indian bonds are also included in Bloomberg’s Emerging Market Local Currency Bond Index.

What Bloomberg deferred was the inclusion of Indian bonds in its Global Aggregate Bond Index (BGAI), which is tracked by a large pool of global passive bond funds.

Bloomberg cited the need for deeper engagement with bond market stakeholders before finalising inclusion. One key factor is the sheer size of India’s bond market. With outstanding bonds of around ₹120 trillion, India’s bond market is significantly larger than many countries already included in the index.

This scale increases operational and settlement complexity for global investors.

What Non-Inclusion Means for Global Bond Flows

The most direct implication of this deferment relates to capital flows.

Global passive bond funds operate much like passive equity funds. They allocate capital strictly based on index weightings rather than discretionary decisions. For Indian bonds to receive consistent flows from these funds, inclusion in major global indices is essential.

Had Indian bonds been included in the Bloomberg Global Aggregate Bond Index:

• Estimated inflows could have been $20–25 billion
• These inflows would have arrived steadily over several months
• The flows would have been relatively insensitive to short-term market noise

With the inclusion deferred, these potential flows will remain on hold until the decision is revisited.

Why This Matters in the Current Context

The timing of the deferment matters.

From India’s perspective:

• Inclusion would have provided a positive signal ahead of the Union Budget on 1 February
• Steady bond inflows could have helped offset foreign portfolio investor selling in equities
• An inflow of around $25 billion over 10 months could have supported rupee stability, potentially keeping it comfortably below the ₹90 per dollar level

Without these flows, the bond market loses a potential source of structural demand in the near term.

What Bloomberg’s Feedback Reveals About Market Gaps

Bloomberg’s reasons for deferring inclusion also highlight specific areas where India’s bond market infrastructure needs improvement.

Key concerns raised include:

• Lack of fully automated trading workflows
• Settlement and repatriation timelines that are longer than global norms
• Complex post-trade tax processes
• Lengthy and convoluted fund registration procedures

For large global asset managers, these operational frictions increase costs and execution risk, especially when deploying passive capital at scale.

What Needs to Change on the Indian Side

The deferment is not a rejection. It is a signal.

Addressing these issues would not only improve India’s chances of inclusion in the Bloomberg Global Aggregate Bond Index but also make the bond market more accessible to long-term global investors.

Key priorities include:

• Improving market infrastructure and automation
• Simplifying settlement and repatriation processes
• Streamlining post-trade taxation
• Reducing time taken for fund registrations

The faster these gaps are addressed, the stronger India’s case for global index inclusion becomes.

The Bigger Picture

The recent spike in yields should be seen in the right context. It was driven by positioning and expectations, not by deterioration in fundamentals.

India’s inclusion in global bond indices is delayed, not denied. The episode underscores how important operational readiness is in attracting global passive capital, especially in debt markets.

For India, the focus now shifts from timing to execution.

Key Takeaways

• The 10-year Indian bond yield rose 5 bps after Bloomberg deferred index inclusion
• The move was driven by bond selling and price-yield mechanics, not fundamentals
• India is already part of S&P, JP Morgan, FTSE, and Bloomberg EM bond indices
• Non-inclusion delays potential passive inflows of $20–25 billion
• Bloomberg highlighted infrastructure and process gaps as key concerns
• Addressing these issues can unlock long-term, stable bond inflows

Disclaimer: This article is for general information and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or financial products. Market and currency movements are subject to risks and may change without notice. Please consult a qualified professional before making any financial decision.