$25-30 bn inflows expected on inclusion of Indian govt bonds in JP Morgan EM Bond Index on June 28

The Indian debt market stands at a cornerstone of the nation’s financial landscape, serving as a vital avenue for raising capital and facilitating investment. Understanding its size and constituent elements provide crucial insights into the broader economic landscape and investment opportunities. Of late, fixed income has been gaining traction amongst all retail investors amid the announcement of inclusion of Indian bonds in JP Morgan and Bloomberg Global Emerging Market Indices and S&P upgrading India’s credit rating outlook to ‘positive’ from ‘stable’. In an interaction with Business Today, Vishal Goenka, Co-founder of IndiaBonds.com shared his insights on the bond inclusion, inflows in FY24, what to expect from bond markets, and more. Edited excerpts:

BT: What is the current size of the Indian bond market?

Vishal Goenka: As of financial year 2023-24, the Indian debt market boasted a substantial size, with a total outstanding amount of Rs. 21,614,198 crore. This figure encapsulates the diverse range of issuers and debt instruments currently outstanding in financial markets, reflecting the substantial liquidity and depth characteristic of India’s financial ecosystem. It is to be noted that the above number merely represents the size of outstanding bonds and do not include loans and other forms of borrowings. Also, the bond market size is a small proportion of the equity market cap of $4.38 trillion as of Dec’23 (Source: CEIC), when compared with developed countries where bond markets are often larger than equity markets. This leads us to believe that there is tremendous scope of growth for bond markets straddling the projected growth of India’s economy in the years to come.  BT: Which are the major constituents of the Indian debt market and their size?

Vishal Goenka: There two major segments of the Indian debt market--government bonds (with a share of 78.1%) and corporate bonds (with a share of 21.9%). Government bonds form a substantial portion of the debt market. As of March 2024, outstanding government bonds stood at Rs 168.85 lakh crore. Within this category, G-Secs accounted for the majority share at Rs 98.5 lakh crore, representing 45.6%. State Development Loans (SDLs) comprised 25.5% of government bonds, amounting to Rs. 55.16 lakh crore, while Treasury Bills (T-bills) and floating rate bonds accounted for 4.03% (Rs. 8.72 lakh crores) and 1.93% (Rs. 4.16 lakh crore) respectively.

Additionally, UDAY Bonds and Special Securities constituted smaller proportions of the government bond market, at 0.63% (Rs. 1.36 lakh crore) and 0.44% (Rs. 95,531 crore) respectively, according to CCIL Complementing the government debt segment, corporate bonds represent a vital component of the debt market, amounting to Rs. 47.29 lakh crore, approximately 21.9% of the total market size. The Indian debt market, with its formidable size and diverse array of constituents, plays a pivotal role in the nation’s financial ecosystem and assists in capital raising supporting economic growth, per data by Sebi)

BT: How much foreign inflows or outflows have the Indian bond market witnessed in FY24, compared with the trend in the previous years?

Vishal Goenka: In FY24, the Indian bond market witnessed a notable influx of investment totaling Rs. 1.21 lakh crore ($ 14.86 billion). This surge marks a significant shift from the preceding fiscal year, which experienced a net outflow of Rs. 8,938 crore. Over the past five fiscal years, the market has demonstrated volatility, with investment flows fluctuating between negative and positive territories. These fluctuations underscore the dynamic nature of India’s bond market, influenced by a myriad of domestic and international factors.

BT: What to expect from the bond markets going ahead?

Vishal Goenka: JP Morgan Index inclusion of Indian Government Bonds is a watershed moment for the fixed-income markets in India and is a very welcome move. This compulsorily puts Indian bond markets on the radar of global bond investors and although initial investments are supposed to be to the tune of $25-30 billion, index inclusion paves the way for this number to keep growing in the next few years.

It is important to grow the investor base for any market, and index inclusion helps in expanding the number of players, which further benefits everyone in the form of additional market liquidity. Global investors have been looking to allocate capital to emerging markets, given their reluctance to invest in other large countries like Russia or China in the past couple of years. Hence, the timing of this index inclusion is also almost perfect. I reckon investments will start via government bonds initially, but filter into AAA to lower credit ratings as well in the years to come.