What being part of Bloomberg Bond Index means for India and investors

Indian government bonds could soon be included in the Bloomberg Emerging Market Local Currency Index. The Bloomberg Index Services advisory committee has suggested adding Indian government bonds to its Emerging Market Local Currency Index, and a formal announcement is expected soon. 

Talk of the inclusion has been going around since JPMorgan Chase & Co announced in September last year that Indian government bonds will be included in its benchmark. If approved, it will result in a rush of foreign flows into Indian bonds. How so? Index funds are essentially mutual funds that track a certain index, meaning they mimic the index and hold securities exactly in the same proportion as the index. Fund managers do not actively „manage‟ these funds; they simply deploy the money they get from investors into the index basket as constructed by the index provider. This is called a passive investment strategy.

 Just as in the case of stocks, when a stock makes an entry into an index, all the index funds adjust their portfolios to reflect the change in the index, here too, all index funds tracking the Bloomberg Bond index will adjust their portfolios to make way for Indian bonds – only sovereign bonds. This means they will buy these Indian government securities, thus ploughing funds into Indian treasury bond market. Currently, the total assets under management under index funds that track the Bloomberg Bond Index is about $3 trillion. India is likely to have a 0.6-0.8 percent index weight, meaning $15-20 billion will probably be directed towards Indian treasuries.