Caution: The watchword for bond index inclusion

The RBI Governor is right to be wary of Indian bonds being included in a major global bond index from next year. As a double-edged sword, its risks require close consideration

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It's a double-edged sword. ...As you well know, there are lots of passive investors who are mainly influenced by your weightage in the index," said Reserve Bank of India (RBI) Governor Shaktikanta Das, speaking at a finance industry conclave in late October 2023. Elaborating on the pros and cons of India's inclusion in a major global bond index (GBI), Das added, "The reverse can also happen. When your weightage goes down, the passive funds will automatically move out, or when there is some other development globally happening, there can be outflow of funds." This was the first 'official' reaction from a central bank that has all along studiously avoided any comment on India's GBI inclusion up ahead. And it was long overdue. Foreign brokerages have been lobbying hard for India's inclusion in the index, publicly holding out the carrot of additional inflows to the tune of $20-25 billion while privately anticipating the lucrative commissions that will doubtless follow.