Exposing India’s Financial Markets to the Vultures

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Exposing India’s Financial Markets to the Vultures Blog Image

Why in News?

  • In recent times, the global financial landscape has witnessed significant developments, particularly in the integration of emerging economies' government bonds into global indices.
  • Amid these developments it becomes imperative to have an assessment of the notable instances involving J.P. Morgan, Bloomberg, and FTSE Russell's moves to incorporate Indian local currency government bonds (LCGBs) into global indices.
  • It is important to explore the motivations, potential benefits, and risks associated with such initiatives.

The Process of Opening Local Bond Markets

  • The process of opening local bond markets to foreign investors represents a strategic initiative undertaken by emerging economies to enhance their global financial integration.
  • In the case of India, this journey started in 2019, with significant strides made by 2020 through the introduction of the fully accessible route (FAR).
  • Despite encountering obstacles, such as delays attributed to the government's stance on capital gains taxes and local settlement, the fundamental policy remained unaltered, demonstrating a commitment to fostering global financial inclusivity.

Significance of J.P. Morgan's Step to Include Indian Local Currency

  • P. Morgan's unveiling of its plan in September 2023 to include Indian LCGBs in its Government Bond Index-Emerging Markets (GBI-EM) Global index suite served as a catalyst.
  • This move not only signalled a significant recognition of India's financial standing but also elevated expectations across the Indian financial landscape.
  • It prompted anticipation from other influential index providers such as Bloomberg-Barclays and FTSE Russell.
  • The subsequent announcement by Bloomberg Index Services in January 2024 to include India's fully accessible route (FAR) bonds in the Bloomberg Emerging Market Local Currency Index added further momentum.
  • The attention now turns to FTSE Russell, emphasising the growing influence and anticipation of reforms in India's government bond market.

Benefits of Internationalising Bond Markets

  • Reduced Dependence on Domestic Institutions
    • By integrating local currency government bonds into global indices, emerging economies like India aim to diminish their dependence on domestic financial institutions.
    • This reduced reliance on domestic sources for capital can provide a diversified funding base, contributing to financial stability.
  • Greater Stability in Funds Tracking Indices
    • Inclusion in global indices can lead to a more stable influx of funds and unlike short-term speculative flows, funds tracking indices often exhibit a longer investment horizon.
    • This stability can be instrumental in mitigating volatility in local financial markets, providing a more secure environment for both domestic and foreign investors.
  • Decline in Cost of Public Borrowing
    • The influx of funds into local currency government bonds can lead to a decline in domestic interest rates.
    • As global investors participate in these markets, the increased demand for local bonds may exert downward pressure on interest rates.
    • This, in turn, reduces the cost of public borrowing for the government.
  • Relief for Local Financial Institutions
    • Increased participation by foreign investors in local bond markets can alleviate the balance sheets of local financial institutions holding these bonds.
    • As foreign investors absorb a portion of the bonds, local institutions may find increased liquidity, potentially leading to more lending and private investment.
  • Mitigating Original Sin
    • One of the key benefits is mitigating the "original sin" problem faced by emerging economies.
    • ‘Original Sin’ is the inability of emerging economies to borrow internationally in their own currencies. 
    • By issuing bonds in their own currencies, rather than borrowing in reserve currencies, these countries shift the exchange rate risk onto international lenders, potentially avoiding widespread private insolvencies during sharp currency declines.

Risks Associated with Internationalisation of Bond Markets

  • Loss of Autonomy and Greater Interest Rate Risks
    • One of the significant risks associated with internationalising bond markets is the potential loss of autonomy in controlling long-term interest rates.
    • Emerging economies become more susceptible to global interest rate fluctuations, which can adversely affect their domestic bond markets and overall economic stability.
  • Exchange Rate Volatility and Spillover Effects
    • Increased participation by foreign investors exposes local currency bond markets to exchange rate volatility.
    • In times of global risk aversion or liquidity challenges, adverse spillover effects can occur.
    • Instances such as the Lehman collapse in 2008 and the recent normalisation of U.S. monetary policy highlight the vulnerability of emerging economies to global market conditions.
  • Volatility in Local Currency Bond Inflows
    • In Malaysia, during 2014-15, the rapid exit of investors from local currency assets, including bonds, resulted in large reserve losses and sharp declines in the ringgit, pushing it to below the levels seen during the Asian crisis.
    • In Türkiye, where macroeconomic imbalances were much more serious, foreigners totally left the bond market after Spring 2018, and reserve losses and currency declines were aggravated as unhedged local forex debtors joined in to avoid exchange rate losses.
    • Sudden stops and exits, as witnessed in Malaysia and Türkiye, highlight the unpredictable nature of these capital flows and the potential for rapid fluctuations in the market.

 The RBI’s Broader Effort and IDG Report

  • Integration of Indian LCGBs into Global Bond Indices
    • The RBI's journey towards internationalisation began in October 2022 with a report by the Inter-Departmental Group (IDG).
    • This report details efforts to integrate Indian local currency government bonds (LCGBs) into global indices.
    • Diversification of Funding Sources
    • The move to include Indian LCGBs in global indices is not solely about attracting foreign capital but also about diversifying funding sources.
    • The IDG report emphasises the need to reduce dependence on domestic institutions and tap into large international resources.
  • Enhancing Stability and Allocation of Investment
    • The report underscores the potential benefits of including LCGBs in global indices, such as enhancing the stability of funds tracking these indices.
    • Stability in funds can contribute to a more predictable investment environment, attracting long-term investors and improving the allocation of investment within the Indian financial market.
  • Rupee Internationalisation Beyond Bond Markets
    • The IDG report places the integration of LCGBs into global indices as just one facet of a broader effort to internationalise the Indian rupee.
    • Another crucial element involves permitting banking services in the rupee (INR) outside the country.

Way Forward

  • Need a Balancing Act
    • While the opening of local bond markets brings about numerous opportunities, it requires a delicate balance.
    • Countries need to strike a balance between attracting foreign capital and managing potential risks.
  • Lessons from Malaysia and Türkiye
    • The lessons from Malaysia and Türkiye highlight the importance of proactively managing offshore markets to prevent excessive speculation and maintain currency stability.
    • These experiences underscore the need for regulatory vigilance, timely interventions, and a balanced approach to fostering internationalization while safeguarding macroeconomic stability.


  • The process of opening local bond markets is a pivotal step for emerging economies seeking greater integration into the global financial landscape.
  • The recent developments involving J.P. Morgan, Bloomberg, and FTSE Russell highlight the growing recognition of India's financial market potential.
  • As India embarks on this journey, it must navigate the complexities, carefully balance risks and benefits, and adapt to the evolving global financial landscape to ensure long-term success and stability.

Q1) What is the purpose of global indices in the financial markets?

Global indices serve as benchmarks to measure the performance of various financial markets and asset classes on a global scale. These indices provide investors and analysts with a comprehensive snapshot of the overall market trends, allowing them to assess the health and direction of the global economy. Common global indices include the MSCI World Index, FTSE All-World Index, and the S&P Global 1200.


Q2) How do global indices impact investment decisions?

Global indices play a crucial role in guiding investment decisions by helping investors gauge the relative strength or weakness of different markets. Investors often use these indices as benchmarks to evaluate the performance of their portfolios against broader market trends. Additionally, global indices can influence asset allocation strategies, providing insights into which regions or sectors may offer attractive investment opportunities or pose potential risks. Keeping a close eye on these indices assists investors in making informed decisions to optimise their investment portfolios.

Source: The Hindu