India's inclusion in popular government bond indexes such as the J.P. Morgan's Government Bond-Emerging Markets-Global Diversified index could attract about $20 billion-$40 billion in over a year, Standard Chartered Bank writes in a note on Thursday.
India will, however, have to do away with the foreign fund investment limits in government debt, currently capped at $30 billion, which is a key criteria for inclusion in such indexes as the market otherwise is considered restrictive.
The bank said the move would help the rupee and the debt market while also easing balance of payments concerns. It will result in foreign fund outflows from Turkey, Indonesia, Thailand and Hungary, they added. Standard Chartered expects India to have around 10 percent weight in the index eventually, though it may be assigned a lower weightage in the beginning.
The investment bank says Indian policymakers' belief that high foreign ownership would lead to elevated bond-market volatility may be unfounded as research across 14 EM countries shows only a weak relationship between these two factors.
The bank expects India's inclusion to firstly help bond markets by bringing in inflows from a wider investor base, deepen the market, and boost the rupee while also helping the economy at large.