Entering the Global Bond Club in Dhotis and Sarees

For years, India approached the question of global bond index inclusion with considerable caution. The Government and the Reserve Bank of India repeatedly emphasised that foreign investors would be welcome, but only on terms consistent with India’s domestic priorities. Former Finance Secretary T. V. Somanathan’s memorable observation that India would enter global bond markets “with our dhotis and sarees” captured this sentiment perfectly. India would participate in global finance, but without compromising its policy autonomy. Few would disagree with that principle.

India today seeks a larger role in global finance. It wants the rupee to gain greater international acceptance, Indian bonds to become a recognised asset class, and Indian markets to attract long-term capital. Bond index inclusion is not merely about foreign money. It is also about financial integration and visibility. Yet, looking back, it is worth asking whether caution occasionally became excessive caution.

The debate is particularly relevant today because several measures once resisted have gradually been accepted. Tax exemptions have been extended to foreign investors in specified government securities. Investments in Government Bonds under the Fully Accessible Route has been widened. Restrictions that once appeared necessary have been diluted or removed.

Why Not Earlier?

The question therefore arises: if these measures were acceptable today, could they have been implemented earlier? No one can know with certainty what alternative history might have looked like. Economic counterfactuals must always be approached with humility. However, it is reasonable to believe that earlier integration with global bond markets would have accelerated foreign participation in Indian government securities.

The Likely Benefits

Such participation would likely have produced several benefits.

First, India’s foreign exchange reserves could have grown faster than they did. Additional inflows into government securities would have provided the Reserve Bank with greater opportunities to accumulate reserves during favourable periods. Whether reserves would have crossed any specific milestone is impossible to establish, but the direction of travel would almost certainly have been positive.

Second, government borrowing costs might have been somewhat lower. India operates one of the largest sovereign borrowing programmes in the world. Even a modest reduction in yields can translate into significant savings for the exchequer over time. The argument is not that Indian bond yields would suddenly have converged with those of advanced economies. India’s inflation dynamics, growth profile and fiscal requirements are very different. Yet a deeper investor base generally contributes to better price discovery and lower financing costs. When sovereign bonds enter major global indices, pension funds, insurance companies and central banks begin to study the country more closely. This often leads to secondary benefits extending beyond debt markets into equities, infrastructure and direct investments.

Third, a larger pool of long-term foreign capital could have provided additional support to the rupee. Exchange rates are influenced by numerous factors including trade deficits, commodity prices, global dollar strength and domestic inflation. No single reform can permanently alter that reality. Nevertheless, stronger and more predictable debt inflows would likely have reduced some pressure on the currency and lessened the need for repeated interventions.

The benefits extend beyond numbers. Inclusion in major global bond indices is increasingly a mark of financial maturity. It places a country’s debt market on the radar of pension funds, sovereign wealth funds and institutional investors worldwide. It improves visibility, enhances credibility and often acts as a gateway to broader financial integration.

The Concerns

To be fair, policymakers had legitimate concerns. Many emerging markets have experienced volatility when foreign participation became excessive. Sudden inflows can be followed by sudden outflows. Bond markets can become more sensitive to global risk sentiment. Central banks can find themselves balancing domestic priorities against external market reactions.

The Reserve Bank’s preference for gradualism did not emerge without reason. Its institutional culture has long favoured stability over speed, and India’s resilience during several global crises owes much to that approach.

The issue, therefore, is not whether caution was justified. The issue is whether the balance tilted too far towards caution. In retrospect, the most striking aspect of the story is that many reforms eventually adopted resemble measures that foreign investors had been seeking for years. What was once viewed as a concession is now viewed as a necessary step in strengthening India’s position within global capital markets.

History may well conclude that India was right to be prudent. But history may also ask whether some of the benefits now being pursued could have been secured earlier.

The lesson is simple. In economic policymaking, prudence is indispensable. Yet prudence delivers its greatest value when it protects opportunity rather than postpones it. India’s experience with global bond market integration offers a reminder that there is a fine line between caution and delay—and that line often becomes visible only in hindsight.

Did India miss the opportunity to enter the global bond indices in dhotis and sarees?