Bloomberg Index Services has deferred a decision on including Indian government bonds in its flagship Global Aggregate Index for the third time, continuing its cautious approach despite significant reforms aimed at improving market accessibility for foreign investors. In a press release on Friday, Bloomberg stated that global investors want to see recent market reforms become more firmly embedded in day-to-day trading before the bonds are admitted. The index provider continued discussions with investors, custodians, trading venues, regulators and other stakeholders following the conclusion of its consultation process in January, reflecting broad recognition of India's progress in improving market accessibility. However, feedback from investors indicated that many market participants would like to see these enhancements become more firmly established in day-to-day market practice before a decision is made on index inclusion. The inclusion was expected to bring foreign inflows of around $20-25 billion into gilts, making this deferral particularly significant for India's bond market development.
The market was running on expectations that Indian government bonds will be included in the Bloomberg index, as noted by Vijay Sharma, senior executive vice-president at PNB Gilts. Since this has not happened, the markets could witness a sell off by 8-10 basis points, with one basis point representing a hundredth of a percentage point. Yields on the 10-year benchmark government bond closed at 6.84% on Friday, up three basis points from its previous close, with bond dealers expecting yields to trade around 6.90% on Monday. Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, expects a selloff of around 5-10 basis points in the bond market on Monday, noting that "a lot was riding on the index inclusion and those hopes have been belied." Goldman Sachs had expected $15 billion passive inflows in the phase-in period after the inclusion announcement, highlighting the significant market impact of this deferral. Estimates of inflows varied, but even the most conservative among analysts had penciled in $10-15 billion of inflows during the phase-in window itself, as per The Economic Times.
Foreign investors have net sold ₹65 billion ($682 million) of securities under the Fully Accessible Route over the past five sessions, marking a dramatic reversal from less than two months earlier when foreign investors accumulated Indian bonds. Between June 1 and July 23, foreign investors had poured ₹426 billion into FAR bonds, which are included in three major emerging-market debt indexes. However, towards the month-end, foreign investors also began dumping Indian government bonds, rattled by the oil price surge and the absence of any announcement on India's inclusion into Bloomberg's global bond index. FPI flows via FAR slipped 85% to $322 million in July compared to $2.27 billion in June 2026, as per The Hindu BusinessLine. However, for the seven months from January to July, the FPI inflow recorded a 6.2% jump to $4.2 billion compared to $3.96 billion in the same period last year. Gaura Sengupta from IDFC First Bank warned that the Bloomberg announcement is likely to trigger a near-term negative reaction, with potential outflows from the FAR and bond yields opening higher on Monday as optimism around index inclusion gets unwound.
Bloomberg highlighted key reforms that have encouraged progress toward index inclusion, including the removal of withholding tax and capital gains tax for eligible foreign investors in government bonds. The tax changes reduce operational complexity and improve settlement efficiency—two factors that are critical for international investors managing large passive and active fixed income portfolios. Additionally, electronic trading in Indian government bonds has expanded, with automated trading platforms now supporting execution across many major investor regions. However, even as automated trading capabilities continue to expand, index respondents noted that implementation has not yet been fully completed across all major investor regions, as per The Hindu BusinessLine. A number of respondents indicated they would like to see further evidence that recent market reforms translate into more efficient operational workflows, including improvements to account opening and processes for adding foreign investors. As per NDTV Profit, Bloomberg emphasised that because the Global Aggregate Index serves as a flagship benchmark for global investment-grade fixed income markets, any inclusion decision must be supported not only by policy reforms but also by proven operational efficiency across the diverse investor base that tracks the index.
Brent crude futures were 22% higher in July, their biggest monthly surge since March, contributing significantly to the bond market decline. Brent crude has surged more than 30% over the past three weeks, briefly topping $100 a barrel, creating substantial uncertainty among overseas investors. For India, crude oil remains the single most important external macro variable, according to Axis Mutual Fund. The rebounding crude oil prices have created heightened concerns over India's inflation, fiscal position, current account and the rupee, as India imports around 90% of its crude oil requirements. Market participants attributed the decline primarily to renewed West Asia tensions and the withering U.S.-Iran peace deal that yanked oil prices higher. Brent crude surged past $120 a barrel in end-April before easing on the peace deal between the US and Iran, but a resumption in hostilities has seen energy prices rise again, as per The Hindu BusinessLine.
