Index Inclusion Impact: How Foreign Funds Are Reshaping India's ₹226 Trillion Bond Market

AB Digital Media

New Delhi [India], September 18: India bond market stands at an unprecedented inflection point in 2025, having reached a staggering size of ₹238 trillion (approximately $2.69 trillion) by March 2025, representing a remarkable 10.2 growth from the previous fiscal year. This monumental achievement places India among the world largest bond markets, yet it represents far more than mere numerical expansion. The true transformation lies in the fundamental reshaping of market dynamics through foreign fund participation, catalyzed by index inclusion and supported by the Reserve Bank of India accommodative monetary policy stance. With the RBI having implemented cumulative repo rate cuts of 100 basis points to 5.50 since February 2025, the interest rate environment has created ideal conditions for both domestic and international investors to embrace Indian fixed-income securities. The confluence of regulatory reforms, technological advancement, and strategic policy initiatives has positioned India bond market as a compelling destination for global capital, fundamentally altering the investment landscape and creating unprecedented opportunities for market participants across the spectrum.

India Corporate Bond Market at a Historic Crossroads

The corporate segment of India bond market has emerged as the most dynamic component of this transformation, reaching ₹53.64 trillion and contributing an outsized 29 of the overall market growth despite representing only 22.51 of total market size. This disproportionate contribution to growth reflects the structural shift occurring within India financial system, where corporations are increasingly turning to capital markets rather than traditional bank financing to meet their funding requirements. The corporate bond market impressive 13.4 growth rate in FY2025 significantly outpaced the overall market expansion, demonstrating the segment resilience and attractiveness to both issuers and investors. This growth trajectory has been supported by several key factors including declining interest rates, improved corporate balance sheets following post-pandemic deleveraging, and enhanced market infrastructure that has reduced transaction costs and operational complexities. The emergence of SEBI-regulated Online Bond Platforms has played a crucial role in accelerating retailization and transparency in corporate bond markets, while slower transmission of interest rate cuts in the banking sector has made capital market access more attractive for corporate borrowers. The sector evolution from a bank-dominated financing system to a more balanced approach incorporating capital market funding represents a fundamental maturation of India financial ecosystem, creating deeper liquidity pools and more diverse funding options for corporate India.

Macroeconomic Tailwinds Fueling Market Expansion

The extraordinary growth in India bond market has been underpinned by a remarkable convergence of favorable macroeconomic conditions that have created an almost perfect environment for fixed-income investing. The Reserve Bank of India decisive monetary policy actions, implementing three consecutive repo rate cuts totaling 100 basis points between February and June 2025, have fundamentally transformed the interest rate landscape and created compelling investment opportunities across the yield curve. This accommodative monetary stance has been justified by India success in controlling inflation, which moderated to 3.2 in April 2025, well within the RBI comfort zone and providing policy space for continued support to economic growth. The combination of declining rates and stable inflation has generated attractive real returns for bond investors while simultaneously reducing borrowing costs for corporate issuers, creating a virtuous cycle that has supported robust issuance activity. Additionally, India strong economic fundamentals, including GDP growth projections of 6.5-7 for FY2025-26, have enhanced the attractiveness of Indian assets to foreign investors seeking exposure to one of the world fastest-growing major economies. The government fiscal discipline, demonstrated through adherence to deficit targets and improved tax collection efficiency, has further strengthened investor confidence in the sustainability of India debt markets.

Foreign Funds: Catalysts of Transformation

Foreign investment has emerged as a transformative force in India bond market, with international capital flows reaching unprecedented levels and fundamentally altering market dynamics across government and corporate securities segments. Foreign investment in Indian corporate bonds witnessed extraordinary growth in 2025, with May alone recording inflows of ₹20,996 crore--the highest monthly inflow in a decade since January 2015. This surge was primarily driven by a massive $3.35 billion fundraising by the Shapoorji Pallonji group, which offered an attractive 19.75 yield and attracted marquee international institutions including Deutsche Bank, BlackRock, Morgan Stanley, Davidson Kempner, and Cerberus Capital. The cumulative foreign investment in corporate bonds for FY2025 reached ₹12,382 crore, representing a nearly threefold increase from the ₹4,511 crore recorded in FY2024, indicating a fundamental shift in international investor perception of Indian credit markets. The Reserve Bank of India strategic policy reforms have been instrumental in facilitating this transformation, particularly the removal of short-term investment limits and concentration limits for foreign portfolio investors in corporate debt securities. Previously, foreign portfolio investors were restricted to allocating a maximum of 30 of their investments to instruments maturing within one year, while concentration limits capped exposure to 15 for long-term bonds and 10 for other categories. The elimination of these restrictions has encouraged wider participation in high-yield segments of the Indian debt market, with total foreign investment in corporate bonds standing at ₹1.28 trillion as of June 2025, representing just 16.74 of the utilized limit against a total available allocation of ₹6.35 trillion, indicating substantial headroom for continued growth.

Index Inclusion: What Does it Mean?

The inclusion of Indian government bonds in JPMorgan Government Bond Index-Emerging Markets on June 28, 2024, represents a watershed moment that has fundamentally transformed the dynamics of foreign investment in Indian debt markets. This milestone, achieved after more than a decade of discussions between the Indian government and index compilers that began during the 2013 taper tantrum crisis, has positioned India to receive substantial passive investment flows from global institutional investors who track emerging market indices. India weight in the JPMorgan index is designed to increase gradually to 10 over a 10-month period starting from June 2024, implying that passive investors tracking this index are expected to allocate 10 of their emerging market debt investments to India. The significance of index inclusion extends far beyond the immediate capital flows, as it represents international recognition of India financial market maturity, regulatory framework, and economic stability. Global bond indices serve as crucial benchmarks for international pension funds, mutual funds, and passive investment strategies, with index inclusion typically leading to sustained and predictable capital flows that are less susceptible to short-term volatility compared to active investment strategies.

Market Dynamics Post-Inclusion

The impact of index inclusion on India bond market dynamics has been both immediate and profound, with foreign ownership of Indian government bonds eligible for unrestricted investment crossing ₹3 trillion ($35 billion) for the first time as of March 2025. This represents a doubling of foreign ownership over the preceding 14 months, reaching nearly 7 of eligible bonds as international investors positioned themselves ahead of anticipated interest rate cuts and to align their portfolios with index requirements. The surge in foreign participation has been particularly pronounced in specific maturity segments, with two-year and eight-year bonds experiencing foreign ownership levels of 153 and 147 respectively, indicating strong international appetite for these tenor points. The pattern of foreign investment has evolved significantly, with investors acquiring ₹124 billion in bonds during the last two weeks of March 2025, a substantial increase from the ₹40 billion purchased in the initial two weeks of the month, demonstrating the accelerating pace of index-driven flows. This sustained foreign participation has contributed to a compression in government bond yields, with the benchmark 10-year government security experiencing significant price appreciation as international demand has complemented domestic institutional buying.

The Role of Retail and Domestic Institutions

While foreign investment has garnered significant attention, the role of domestic institutions and the emerging retail investor segment remains crucial to the sustainable development of India bond market ecosystem. Institutional investors, including mutual funds, insurance companies, and pension funds, continue to dominate bond market holdings with approximately 96 of total investments, providing the stable foundation necessary for market liquidity and price stability. These domestic institutional investors have benefited significantly from the enhanced market infrastructure and regulatory reforms, gaining access to a broader universe of investment opportunities and improved operational efficiency through digital platforms and streamlined settlement processes. The retail investor segment, while still representing a small percentage of total holdings, has shown remarkable growth momentum facilitated by SEBI regulatory reforms that reduced minimum investment requirements from ₹1 lakh to ₹10,000 for privately placed bonds. The number of retail transactions in the bond market reported 327 growth in FY2024-25 according to BSE data, indicating the rapid adoption of bond investing among individual investors seeking alternatives to traditional bank deposits and volatile equity markets. This retail participation trend has been supported by the emergence of user-friendly digital platforms like

Altifi

that have democratized access to institutional-quality investment opportunities while providing comprehensive investor education and portfolio management tools.

Investment Strategies in the New Landscape

The transformation of India bond market through foreign fund participation and index inclusion has created a fundamentally altered investment landscape that requires sophisticated strategy adaptation across investor categories. For domestic institutional investors, the enhanced liquidity and improved price discovery mechanisms have enabled more active portfolio management strategies, including tactical duration positioning, credit curve trading, and cross-sector allocation optimization that were previously difficult to implement due to liquidity constraints. The increased market depth has also facilitated the implementation of more sophisticated risk management techniques, including partial hedging strategies and dynamic asset allocation models that can respond more effectively to changing market conditions and interest rate cycles. The

corporate bond

segment has become particularly attractive for active international strategies, with experienced credit analysts identifying opportunities in the BBB and A-rated segments where yields remain elevated relative to fundamental credit quality due to limited international awareness and participation. Retail investors are increasingly adopting systematic investment approaches through bond laddering strategies and systematic investment plans offered by digital platforms, enabling consistent exposure to attractive yields while managing reinvestment and duration risks through diversified maturity profiles. The enhanced accessibility provided by technology platforms has also enabled retail investors to implement more sophisticated strategies including credit quality diversification, sectoral allocation, and tactical duration management that were previously available only to institutional investors with substantial resources and expertise.

Outlook and Future Prospects

The outlook for India bond market remains exceptionally positive, with structural and cyclical factors suggesting continued robust growth and further integration with global capital markets throughout 2025 and beyond. Market participants and analysts project total bond issuances to reach approximately ₹11-12 trillion in FY2026, driven by continued corporate borrowing needs, government infrastructure spending, and the ongoing transition from bank-dominated to market-based financing that is characteristic of mature financial systems. The foreign investment trajectory appears sustainable, with significant headroom remaining within existing limits and continued policy support from both Indian regulators and international index providers who recognize India growing importance in global fixed-income portfolios. The corporate bond segment is expected to maintain its leadership in growth terms, with improved credit quality, enhanced transparency, and regulatory reforms creating conditions for sustained expansion and broader international participation. Technological advancement will continue playing a crucial role, with emerging platforms and improved market infrastructure reducing transaction costs, enhancing liquidity, and expanding accessibility to new investor segments including retail participants and smaller institutional investors. The integration of artificial intelligence, blockchain technology, and advanced analytics into bond market operations promises to further improve efficiency, reduce risks, and enable more sophisticated investment strategies across the participant spectrum.

Conclusion

India ₹226 trillion bond market stands as a testament to the transformative power of strategic policy reform, technological innovation, and international integration in creating world-class financial market infrastructure. The remarkable journey from a bank-dominated, institutionally-focused market to a diverse, technology-enabled ecosystem accessible to participants across the investment spectrum represents one of the most significant financial market developments in India post-independence history. The role of foreign funds in reshaping market dynamics through index inclusion and direct investment has been catalytic, providing not only capital but also international best practices, enhanced liquidity, and validation of India financial market maturity that continues to attract additional global participation. The success of platforms like

Altifi.ai

in democratizing access to institutional-quality investment opportunities demonstrates the potential for continued innovation in market structure and participant accessibility that can support sustained growth while maintaining appropriate risk management and investor protection standards. Looking ahead, India bond market is poised to play an increasingly central role in global fixed-income investing, providing international investors with exposure to one of the world largest and fastest-growing economies while offering domestic participants the tools and opportunities necessary for effective portfolio construction and wealth creation in an evolving financial landscape that rewards sophistication, diversification, and strategic thinking.

Author Name: Ravinder Sahu

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