India bonds: from specialist exposure to strategic allocation
India’s vast and increasingly accessible bond market offers global investors an attractive combination of income and diversification, supported by durable economic growth and expanding index inclusion. As the market moves into the mainstream, we believe that active implementation and local expertise will be critical to navigating its breadth, currency risks, and evolving structure.
India’s onshore bond market is becoming harder for global fixed income investors to ignore. Its scale, improving access for overseas buyers, and a yield profile that stands apart from much of investment grade Asia are helping to move the market from specialist allocation to mainstream consideration. The market is already substantial: India is the third-largest fixed income market in Asia, behind China and Japan, with total outstanding debt of around US$2.75 trillion. That depth creates room for different approaches, from core duration exposure to more selective carry and credit strategies. It also makes manager selection particularly important: Liquidity, governance, risk controls, and local market experience can all shape outcomes.
But scale is only part of the story: Beyond its size and growing accessibility, India’s bond market occupies an unusual position within global fixed income. It’s shaped primarily by domestic economic conditions, policy decisions and local investor behaviour, rather than moving in lockstep with developed-market interest rate cycles. For investors seeking to broaden fixed income exposures beyond traditional rate markets, India can provide a distinct source of duration, carry, and diversification.
A large economy with durable growth drivers
Despite a more challenging backdrop than many had expected at the start of the year, India’s economic outlook remains constructive. Strong domestic demand, resilient investment activity, and a large, increasingly diversified economy continue to provide solid foundations for growth. While geopolitical tensions, trade uncertainty, and periods of market volatility have created headwinds, India has entered this period from a position of relative strength. Growth has remained robust, inflation has moderated from recent highs, and policymakers have continued to balance support for economic activity with a focus on macroeconomic stability. Estimates put growth at between 6.5% and 6.8% this fiscal year, reinforcing India's position among the world's fastest-growing major economies.
Strong growth prospects
Looking further ahead, the long-term outlook remains compelling. India benefits from favourable demographics, rising domestic consumption, ongoing investment in infrastructure, and a growing role in global supply chains. Recent trade agreements and broader economic reforms are expected to deepen integration with the global economy while simultaneously strengthening economic resilience. At the same time, India’s growth story remains largely driven by domestic demand rather than external trade alone, helping to cushion the economy during periods of global uncertainty. Risks remain, however, including inflation pressures, capital-flow volatility, and a fragile geopolitical environment. Even so, India’s combination of economic scale, policy credibility, and structural growth drivers continues to support a positive long-term outlook.
Diversification beyond developed-market rate cycles
Beyond its growing accessibility and market depth, India’s bond market offers exposure to a different set of economic and policy dynamics than many developed-market peers. Correlations with major rate markets have remained low over the past decade (0.23 versus U.S. Treasuries and 0.37 versus Global Treasuries), reflecting a market shaped by its own domestic growth cycle, policy framework, and investor base, rather than one moving in tandem with developed-market interest rate cycles.
The distinction is also evident when local INR bonds are compared with Indian US dollar credit. Over the 10 years to July 2026, local INR bonds had a correlation of 0.24 with the Bloomberg Global Aggregate Index in INR terms and 0.40 in US dollar terms, compared with 0.56 for Indian US dollar credit. This suggests that local INR bonds have historically offered greater diversification from global fixed income than the offshore Indian credit market.
Asian bonds stand out in global context
India’s local currency government bond market continues to stand out on both nominal and real yield measures. With 10-year yields around the high 6% to ~7% range, India offers a level of carry that remains compelling relative to many global investment-grade alternatives, while also providing a cushion against volatility through a higher starting yield. Importantly, this yield profile is delivered by an investment-grade sovereign, helping position India as a source of income and potential diversification rather than a pure credit-risk trade.
That differentiated return profile is rooted in the strength and resilience of India’s domestic economy. While periods of volatility are inevitable, including those linked to oil prices and geopolitical developments, the broader economic trajectory remains constructive, and India is expected to remain among the fastest-growing economies in Asia. Importantly for fixed income investors, that growth has been accompanied by more than 17 years of investment grade sovereign ratings across the major agencies.
Those economic and policy conditions also help explain why India’s bond market has historically followed a different path from many developed-market peers. Inflation, monetary policy, economic growth, and the behaviour of domestic investors all play significant roles in shaping market outcomes. Because these drivers are often distinct from those influencing developed-market rates, Indian bonds have frequently exhibited different return patterns, helping broaden the opportunity set within global fixed income portfolios.
INR bonds have produced strong risk-adjusted returns vs. both DM and EM bonds
Returns (USD)
For international investors, capturing those diversification benefits also requires careful consideration of how exposure is implemented, with currency exposure remaining an important factor. While an unhedged approach allows investors to capture the full local-market return profile, it also introduces foreign exchange volatility that can influence outcomes over shorter time horizons. The appropriate approach will depend on an investor’s objectives, base currency, and risk tolerance, making portfolio construction and active risk management important elements of implementation.
FX hedging reduces overall yield but can minimize short-term volatility
Index inclusion is turning access into allocation
Anyone observing India’s progress will have noticed that several technical tailwinds that have been building for years are now beginning to take effect. India joined the JPM GBI-EM Global Diversified Index suite in June 2024, and inclusion in FTSE Russell’s EMGBI followed in September 2025. These milestones were made possible by the Fully Accessible Route (FAR) market access framework, which transformed access to India’s government bond market by removing quotas and investment restrictions for eligible securities. Introduced in 2020, FAR has helped remove one of the key barriers that historically limited foreign participation.
Policy has also improved the after-tax proposition for overseas institutions, helping support a broader, stickier investor base. Recent measures have targeted a key friction for foreign participation by exempting eligible foreign institutional investors from capital gains and interest income taxes on Indian government securities. By reducing tax drag and simplifying access, these reforms are intended to enhance net returns, encourage incremental inflows, and reinforce the long-term effort to deepen and internationalise the local bond market.
The significance of these developments extends beyond access alone; Inclusion in major bond benchmarks increases the market’s visibility, broadens its potential investor base, and can encourage more consistent foreign participation over time. Markets that become easier to access and easier to own tend to attract a wider range of global investors, particularly when they offer characteristics that are difficult to find elsewhere in fixed income. India’s combination of scale, investment grade status, and relatively attractive yields has drawn increasing attention as that process has unfolded.
Attention is now turning to the next stage of that evolution and the potential for India to join broader global fixed income indices, including the Bloomberg Global Aggregate Index, which reports suggest could lead to total inflows of US$27 billion by 2028. Bloomberg Index Services announced in July that it was once again deferring India’s inclusion in the index, but investors remain optimistic that it will eventually happen. This would represent another major step toward deeper integration with global capital markets and could support an additional wave of institutional demand.
Monetary policy forms part of the same backdrop. The Reserve Bank of India’s easing cycle in 2025, through a combination of rate cuts and liquidity support measures, has provided a supportive environment for local fixed income markets while nominal yields remain relatively high. Taken together, improving market access, expanding benchmark representation, and supportive domestic policy provide a constructive backdrop for the continued development of India’s bond market.
Access is only the starting point
As India’s bond market becomes more widely understood, investor attention is beginning to shift from access to implementation. The opportunity set extends well beyond benchmark exposure: In addition to IGBs, the investable universe includes INR supranationals, India USD credit1, and a large onshore INR credit market—around US$0.6 trillion across roughly 3,876 issuers. This breadth creates scope for incremental carry through active credit selection, rather than relying solely on sovereign duration.
Within the local INR market, the Fully Accessible Route has made eligible government bonds easier for global investors to own, but opportunities beyond FAR securities require deeper local capability. Investors with on-the-ground credit experience can assess INR quasi-sovereigns and high-grade corporate bonds, where yields may offer a meaningful spread pickup relative to comparable INR government securities.
India fixed income market overview
Outstanding India Bond (Onshore)
Outstanding INR Supranationals
Decisions around duration, curve positioning, security selection, and, where appropriate, currency exposure can all influence outcomes. As the market has grown and become more accessible, investors have gained access to a broader range of ways to express views across rates, credit, and carry opportunities.
The increasing accessibility of the market hasn't made those decisions any less important. Liquidity conditions, market structure, settlement processes, and currency considerations can all shape investment outcomes, while market evolution continues to create both opportunities and risks. In that environment, active positioning can play an important role in balancing return objectives with risk management.
For investors allocating to India, the challenge is often less about gaining exposure than deciding how that exposure should be managed. Experience, local market knowledge, and implementation capability can all influence how effectively opportunities are identified and risks are navigated over time.
Important disclosures
Important disclosures
1 The Indian government does not issue sovereign bonds in US dollars; “India USD credit” instead refers to US dollar-denominated bonds issued by Indian quasi-government entities and corporates, as represented by the JACI India index.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated.
The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
About Manulife Wealth & Asset Management
As part of Manulife Financial Corporation, Manulife Wealth & Asset Management’s mission is to make decisions easier and lives better by helping people invest confidently to pursue a more secure financial future. Our strength comes from the diversity of our global asset management expertise and distribution capabilities. Our global investment teams span equities, fixed income, alternative credit, private markets, and multi-asset solutions. We provide investment, financial advice, and retirement plan services to millions of individuals, institutions, and retirement plan members worldwide. At the heart of our approach are three cultural pillars: Partner for Progress, Trust through Transparency, and Intellectual Curiosity. These values shape how we build long- term relationships, develop differentiated investment strategies, and empower advisors and clients to seek meaningful financial outcomes. Whether through cutting-edge technology, AI innovation, personalized advice, or sustainable stewardship, Manulife Wealth & Asset Management is a trusted partner helping clients navigate complexity and invest with confidence. Not all offerings are available in all jurisdictions. For additional information, please visit manulifeim.com.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional
Australia: Manulife Investment Management Timberland and Agriculture (Australasia) Pty Ltd, Manulife Investment Management (Hong Kong) Limited. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. Chinese Mainland: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area: Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Manulife Investment Management Timberland and Agriculture Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.
5902953