Bloomberg India Aggregate Index Entry Depends on Demand, Rupee

Mumbai: India has cleared some of the biggest hurdles reported by Bloomberg Index Services to including sovereign debt in its global comprehensive bond index, but weak investor appetite, increased hedging costs and fears of a falling rupee may still keep the country out of one of the world’s most influential bonds, market participants said.

The government and the Reserve Bank of India (RBI) on Friday unveiled a series of measures aimed at attracting foreign capital, including tax exemptions for foreign portfolio investors (FPIs), expanding the universe of securities eligible under the Fully Accessible Route (FAR) and steps to facilitate overseas investment in India’s debt markets.

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The government has exempted FPIs from income tax on interest income and capital gains arising from investments in government securities. The exemption effective from April 1, 2026 will apply to all interest and capital gains earned by FPIs on G-Sec investments from that date. A similar income tax exemption was granted to the Bank for International Settlements (BIS).

Quick answers to key questions

•5 QUESTIONS

The Indian government has introduced tax exemptions for foreign portfolio investors on interest income and capital gains on government securities, expanded the range of securities eligible under the fully accessible route, and facilitated foreign investment in Indian debt markets.

Increased hedging costs make Indian government bonds less attractive compared to alternatives such as US Treasury yields, leading to reduced demand from global fund managers for inclusion in major bond indexes.

The RBI has announced measures such as concessional forex swap for public sector undertakings and will cover the full cost of collateral for authorized dealer banks mobilizing fresh deposits of non-residents in foreign currency.

While recent measures have improved operating conditions, the final inclusion will depend on whether global investors perceive sufficient value in India’s government bonds amid ongoing economic challenges.

The tax exemption on government securities is expected to boost foreign portfolio investment by making Indian bonds more attractive, thereby facilitating government borrowing at lower interest rates.

“The tax compliance issue is gone and they have also expanded the world of FAR securities. So it definitely increases the chances of us being included in the index,” said Gaura Sengupta, chief economist at IDFC First Bank.

Among the key moves, the RBI expanded the scope of securities eligible under the FAR, which allows foreign investors to invest in designated G-secs without quantitative restrictions, to include all new issues of 15-year, 30-year and 40-year government bonds.

Decision postponed

While the measure addresses several operational hurdles highlighted by Bloomberg when it delayed a decision on India’s inclusion in January, market participants said the focus has now shifted from market access to whether global investors see enough value in India’s government bonds.

The next major update to the Bloomberg Global Aggregate Index is scheduled for mid-2026. As of now, India is part of the JP Morgan Global Bond Index-Emerging Markets from June 2024, part of the Bloomberg EM Local Currency Government Index from January 2025, and part of the FTSE Russell Emerging Market Index from September 2025.

The bigger problem may no longer be operational, but economic. Inclusion in the Bloomberg Aggregate Index is ultimately driven by the recommendations of an advisory committee of global fund managers.

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“When your G-Sec (Government Securities) if fully hedged is 3.85%, why would the fund manager ask for Indian securities to be added?” a senior economist at a private sector bank said on condition of anonymity. “The FAR increase and the tax changes address earlier concerns. But will the proposal come forward? That’s the biggest hurdle.”

He said the increased cost of currency hedging and lingering concerns about the trajectory of the Indian rupee have reduced the attractiveness of Indian bonds compared to US Treasury yields and other alternatives.

“Whether you hedge or not, it is a losing proposition. It is not in the fund manager’s own interest to recommend India as an inclusion in the GAI (Global Aggregate Index) this year unless rates are much higher,” he said.

In the current financial year, FAR debt inflows have so far stood at $1 billion, up from $1.7 billion in FY26, according to National Securities Depository Ltd data.

It’s not really a requirement

While the tax changes could also reinvigorate efforts to make Indian government bonds compatible with Euroclear, one of the world’s largest international securities settlement systems, some also said Euroclear itself was not necessarily a prerequisite for Bloomberg’s listing.

Foreign banks and investors have long argued that access to Euroclear would simplify investing in Indian bonds by allowing them to settle trades through an infrastructure already used for sovereign bond markets worldwide.

“The Euroclear requirement was never there. So it’s not a stumbling block,” said an official from the private bank’s finance ministry, adding that the focus has now shifted from market access to investor appetite.

The success of the broader package announced by the RBI and the government would also depend on how much foreign money actually flows into the country through the newly liberalized channels.

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“For the next three months, the FCNR (non-resident foreign currency) deposits and the ECB (external commercial borrowing) window are quite relevant. We will see how much money comes in,” said Neeraj Gambhir, managing director of Axis Bank.

Amid sustained pressure on the rupee, the RBI last week also announced moves to reduce collateral costs and encourage overseas fundraising and foreign currency deposits.

It will provide a preferential forex swap facility for public sector enterprises raising funds through external commercial borrowings (ECBs) until September 30, 2026.

RBI will also bear the full collateral cost for authorized dealer banks that mobilize fresh deposits of non-residents in foreign currency – banks or FCNR(B) for 3 to 5 years by September 30.

“We are still waiting for the full details of the FCNR and ECB schemes to see what level of flexibility is being provided to banks. That will determine the magnitude of the flows,” Gambhir said.