India's Bond Market Set for Strong Growth with Sovereign Upgrade, Index Inclusions, and GST Reform

India's bond market is entering a supportive phase due to a rare confluence of tailwinds, including a sovereign rating upgrade by S&P, ongoing index inclusions, and GST reform. This is setting the stage for lower yields, stronger foreign participation, and improving credit dynamics. According to LGT Wealth India's Chirag Doshi, these factors are creating a constructive backdrop for government securities and high-grade corporate bonds, with banks, top-tier NBFCs, and infrastructure financiers likely to be the early beneficiaries.

Title: India's Bond Market Enters a Supportive Phase Amid Rare Tailwinds

India's bond market is experiencing a supportive phase, driven by a confluence of favorable conditions, including a recent sovereign rating upgrade by S&P, ongoing index inclusions, and the implementation of Goods and Services Tax (GST) reform. These developments are poised to lower yields, enhance foreign participation, and improve overall credit dynamics.

On August 14, 2025, S&P Global Ratings upgraded India's long-term sovereign credit rating from 'BBB-' to 'BBB', the first upgrade in 18 years [1]. This upgrade, coupled with a stable outlook, indicates a significant improvement in India's creditworthiness. The rating upgrade reflects India's robust economic growth and enhanced monetary policy environment, which has anchored inflationary expectations [1].

The upgrade has immediate implications for India's debt markets. It has led to a reduction in the yield on the benchmark 10-year government bond, which eased by nearly 10 basis points to around 6.40% on the day of the announcement [1]. This reduction in borrowing costs will ease the interest burden on the government and relieve taxpayers.

The upgrade also signals a boost in investor confidence, both domestic and foreign. It is expected to attract more capital into India's debt markets, with global funds increasingly allocating funds to emerging markets like India [1]. The upgrade has positioned India as a safer borrower relative to other emerging markets, as evidenced by the narrowing yield spread between Indian and US debt [1].

In addition to the rating upgrade, the inclusion of Indian government bonds in major global bond indices such as the JPM GBI-EM and Bloomberg Barclays EM Index is expected to increase India's weightage in these indices [1]. This inclusion will further enhance India's access to global capital markets and attract foreign portfolio investors.

The implementation of GST reform has also contributed to the supportive phase in India's bond market. GST has streamlined the tax system, improved compliance, and enhanced revenue collection, which has positively impacted the fiscal health of the country [1].

These developments are creating a constructive backdrop for government securities and high-grade corporate bonds. Banks, top-tier Non-Banking Financial Companies (NBFCs), and infrastructure financiers are likely to be early beneficiaries of these favorable conditions. The lower borrowing costs and improved access to capital will enable these entities to finance expansion at more competitive rates, thereby boosting overall economic growth.

In conclusion, India's bond market is entering a supportive phase due to a rare confluence of tailwinds, including a sovereign rating upgrade by S&P, ongoing index inclusions, and GST reform. These developments are setting the stage for lower yields, stronger foreign participation, and improving credit dynamics. Investors and financial professionals should closely monitor these developments, as they present significant opportunities for investment in India's debt markets.

References:
[1] https://www.jiraaf.com/blogs/market-insights/india-sovereign-rating-upgrade-sp-bbb-bonds