Explainer: Who lends to govts, & why a list decides

l  How big is the government bonds market?

GOVERNMENTS AND COMPANIES collectively owe approximately $109 trillion in bonds, which is 93% of the world’s annual output—up from 81% ten years ago. Governments are the primary borrowers: with a record $61 trillion in the rich countries and $12 trillion in developing countries. This year, they will issue $29 trillion in new bonds, covering four-fifths of the total, mainly to repay maturing bonds.

Buyers are institutions that need to safeguard assets. However, central banks in developed countries— usually non-judgmental buyers—are now reducing their holdings. As a result, governments need to attract investors who are willing to buy instead.

In India, banks own 34.31% of government bonds, and insurers hold 25.89%. In 2020, the Reserve Bank of India opened the Fully Accessible Route (FAR) which allows purchases of new five-, 10-, and 30-year bonds without limits on amount or holding period, unlike other bonds where foreigners can hold a maximum of 6% and must keep funds for three years. The route only defines which bonds qualify, not the amount of investment, enabling funds to sell quickly when needed.

l  What is a bond index, and what does it test?

AN INDEX IS a published list of bonds with fixed allocations for each country. Nearly $3 trillion is invested according to the Bloomberg Global Aggregate Index, which covers the world’s higher-rated bonds, while about $236 billion follow JP Morgan’s list for developing countries. Many funds just copy this list, buying bonds included without extra analysis. Fund managers who pick bonds independently compare their selections to these lists; if a country is missing from one list, they must justify it. The emphasis is not on whether the government will fulfil its repayment obligations, which is the rating agency’s responsibility, but on whether a Frankfurt-based fund can buy securities on Monday, receive them, make payment smoothly, understand its tax obligations in advance, and sell them on Tuesday. India began these negotiations in 2019, choosing not to have its bonds managed via a European settlement platform but rather to open the market domestically.

l When did these indices include India?

JP Morgan approved the inclusion in September 2023. Instead of listing India immediately, it gradually increased the share by 1% each month starting June 28, 2024, until reaching the 10% cap on March 31, 2025. Bloomberg concurred on March 5, 2024, regarding its developing-country index, gradually taking 10% of India’s eligible bonds each month from January 31, 2025, until October, when all were included. FTSE Russell began in October 2024, progressing in six monthly steps from September 2025, reaching a 9.35% share, second only to China.

l  Did the money follow?

INCLUSION IN AN index typically leads to increased foreign inflows into the debt market. Some of the money came in early, too. Foreigners bought about $11 billion before the first slice was added, then $14 billion more over the ten months of slicing — roughly $25 billion, close to forecast, with nearly half coming in before buying began. Index buying is finite. When the last slice went in, the compulsion ended; no fund had to buy another rupee of these bonds, and those who had bought early booked their gains. In June, when India scrapped both taxes on foreigners, on interest earned and gains made, $6.8 billion came in. Of that, $700 million left in July as oil climbed and Bloomberg Index Services stayed silent.

l  Why Bloomberg preferred to defer inclusion?

SINCE BLOOMBERG’S MAIN list targets a broader range of investors than its developing-country list, it has higher demand. India addressed January’s concerns by June, removing the 20% tax on interest paid to foreigners and the 12.5% tax on their gains. It also introduced new open bonds with maturities of

15, 30, and 40 years. Bloomberg acknowledges India’s ongoing improvements but emphasises that these new rules should become standard practice, especially in electronic trading and the registration process for foreign investors.

l  What does this mean for India?

FOREIGN INVESTORS HOLD just 3% of India’s government bonds. At that size, they cannot bring down the government’s borrowing costs, no matter what an index tells them. What they do bring is a lender of a different kind, one who ignores India’s own news and reacts to the world’s. That is worth having, as central banks in rich countries sell down their holdings and governments everywhere look for buyers. It also means that a jump in oil prices, or a bad week in American bonds, now reaches Indian bond prices faster than before. Policy work has been done; what is left is the plumbing.

The writer is partner, MCQube

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.