Indian Bond Yields Surge After Bloomberg Postpones Index Inclusion
Yields on Indian government bonds increased sharply on Tuesday. This followed an announcement from Bloomberg Index Services. The firm deferred India's inclusion in its flagship Global Aggregate Index. Operational issues were cited as the reason. This decision dashed hopes of imminent foreign fund inflows. It also soured market sentiment significantly.
Market Expectations Crushed by Deferral
Bond traders had been anticipating confirmation this week. They expected India's formal entry into the index. This move was projected to attract substantial foreign investment. Estimates ranged from $20 billion to $25 billion into government debt. Instead, Bloomberg delivered disappointing news. The firm stated it would continue its review of Indian bonds. The next update will not come before mid-2026. This timeline prompted widespread position unwinding across the market.
Bloomberg Fixed Income Indices explained its decision in a press release. The statement noted that several respondents highlighted important operational considerations. These issues require further evaluation before inclusion in a major global index. The index represents a broad and operationally diverse investor base.
Key Operational Hurdles Identified
The firm pointed to specific market-infrastructure challenges. These include the current lack of fully automated trading workflows. Settlement and repatriation timelines linked to post-trade tax processes are also a concern. Furthermore, the complexity and duration of fund registration procedures pose problems. Bloomberg plans to provide a further update on this review by mid-2026. At that time, it will communicate next steps regarding potential inclusion.
Immediate Market Impact and Trader Reaction
Government bonds remained under pressure throughout the trading day. The 10-year benchmark yield rose by 3 basis points to 6.63%. It found some support later as traders stepped in to buy. V.R.C. Reddy, head of treasury at Karur Vysya Bank, commented on the situation.
"Yields had softened over the last two sessions," Reddy said. "This was in anticipation of a favourable announcement on the 14th regarding Bloomberg index inclusion. However, the decision to defer the inclusion to mid-2026 disappointed the market. It prompted traders to unwind their positions."
It is important to remember that bond yields and prices move in opposite directions. When yields rise, bond prices fall, and vice-versa. With the expected index-related fund inflows failing to materialize, yields hardened. These inflows were seen as crucial for easing the demand-supply imbalance.
Spillover Effect on State Development Loans
The investor disappointment spread to the state development loan auctions. Eleven states sought to raise ₹26,815 crore. Market participants noted that expectations of foreign inflows had earlier improved sentiment. Demand, especially among banks and public sector entities, looked stronger. However, after the delay announcement, traders began demanding higher cut-off yields. They factored in spreads of at least 80-85 basis points over government bonds.
Broader Context for Indian Bond Markets
Government bond yields have stayed elevated for much of 2025. This is despite the Reserve Bank of India cutting the policy interest rate by 125 basis points during the year. Tight liquidity conditions and rupee depreciation have weighed on demand for debt. In fact, since early December, the yield on the 10-year benchmark government bond has risen by almost 13 basis points. This followed a 25 basis point repo rate cut by the central bank to 5.25%.
Looking ahead, weak demand and budget concerns may keep yields elevated. There are worries that the budget may provide for higher government borrowing. V.R.C. Reddy suggested yields are likely to remain in the 6.55–6.68% range for the near term.
