The Indian government issues a significant amount of debt, with roughly $1.3 trillion in government bonds outstanding today. A recent game-changer is the inclusion of the Indian government bonds in the JP Morgan Emerging Market Bond Index. This inclusion is phased, with the weight of Indian bonds increasing by 1% each month to a maximum of 10% by March 2025.

This inclusion is expected to attract up to $30 billion from Foreign Portfolio Investors (FPI) into Indian government bonds in the current fiscal year. Already, $10 billion has entered the market, showcasing strong investor interest.

Following JP Morgan, inclusion in the Bloomberg Emerging Market Bond Index is also expected in the medium term, further amplifying foreign investment.

Lower Interest Rates for the Government

The influx of foreign funds lowers the government's borrowing costs. Traditionally, Indian commercial banks and insurance companies held a large share of government bonds. However, foreign investors offer a wider pool of capital, potentially leading to a decrease in interest rates for the government. The 10-year government bond yields have already dipped below 7%, reflecting this trend.

Unlocking Capital for Businesses and Consumers:

With foreign investors taking on a portion of government debt, local capital previously tied up in these bonds can now be directed towards the private sector. This translates to:

• Reduced interest rates on fixed income investing: Banks and NBFCs (Non- Banking Financial Companies) will try to bring down the interest rates on fixed deposits and corporate bonds. Similarly, direct corporate bonds should see a decrease in interest rates.
• Businesses and consumers will have access to loans at potentially lower interest rates, Lower the borrowing costs

Impact on the publicly listed stocks:

This situation creates a positive scenario for two types of companies:

• Financial Institutions:, whose stocks are currently trading at historically low valuations (example: HDFC Bank, Bajaj Finance, SBI Cards, etc.) are expected to see an increase in their Net Interest Margin (Lending interest rate - borrowing interest rate) leading to higher profitability
• Infrastructure companies, which typically operate on high debt can borrow at lower interest rates, improving their profitability.

Remember: Before making portfolio adjustments, thoroughly assess your risk tolerance, investment goals and exposure to asset classes such a REITs, Gold, Bods, etc. Consult a financial advisor for personalized advice specific to your unique situation.