South Korea and India Poised to Join Global Bond Indexes, Attracting Billions in Foreign Investment

South Korea and India are set to join major global bond indexes, marking a significant milestone in the evolution of their financial markets. This move is expected to attract tens of billions of dollars in foreign investment, as global funds tracking these benchmarks will need to buy the countries' debt. The announcement comes at a time when overseas interest in Asian debt markets is on the rise, as yields in the US and Europe decline.

Unlocking the Potential of Asian Debt Markets

South Korea's Inclusion in the FTSE Russell WGBI

South Korea's inclusion in the FTSE Russell's $30 trillion World Government Bond Index (WGBI) is a testament to the country's efforts to improve its financial market infrastructure. The index provider has commended Seoul's progress in enhancing market access for foreign investors, including extending trading hours for the won and making it easier for overseas investors to settle trades via Euroclear. This development is expected to have a positive impact on the Korean financial markets, with analysts predicting a rally in medium-term bonds and a strengthening of the won.The finance ministry in Seoul estimates that the inclusion in the WGBI will attract $56 billion of inflows, which will help manage the government's finances. Korea's weighting in the index is projected to be 2.22%, after it gets phased in on a quarterly basis over a one-year period from November 2025.

India's Addition to the FTSE Emerging Market Bond Index

India's government has taken a more low-key approach to its inclusion in global bond indexes, but the move is no less significant. The country will be added to FTSE Russell's $4.7 trillion emerging market bond index as of next September, over a six-month period, with a final share of 9.35% – the second-highest after China.FTSE Russell's global head of FICC index policy, Nikki Stefanelli, has noted the progress made by India in recent years, stating that the country is becoming an increasingly important part of emerging market debt portfolios. This inclusion comes on the heels of India's addition to JPMorgan Chase & Co.'s widely followed emerging market gauge in June, which drew more than $14 billion of inflows this year. The country is also set to join Bloomberg's local currency government bond index in January.

Navigating the Risks and Opportunities

While the inclusion of South Korea and India in major global bond indexes can attract significant foreign investment, it also poses risks to emerging economies that are frequently buffeted by capital outflows. Korea has pledged to "carefully monitor" both the bonds and the currency market to ensure there's no volatility in response to FTSE's announcement.The world's fastest-growing major economy, India, has already faced the challenges of being regarded as a reform laggard. However, with Russia under sanction due to its invasion of Ukraine, emerging market investors have been almost uniformly bullish on India's debt and pushed for its inclusion in benchmarks.As South Korea and India embrace their new roles in the global financial landscape, they will need to navigate the delicate balance between attracting foreign investment and managing the potential risks associated with increased capital flows. The success of these efforts will have far-reaching implications for the future of Asian debt markets and the broader global financial system.