The inclusion is a “welcome development”, reflecting confidence in the Indian economy, Nageswaran said while speaking to the media in a virtual briefing after the announcement on Friday.
Citing various brokerages, he said that this move could lead to an inflow of $20–$26 billion in a year.
“Naturally, there will be a tendency for the currency to appreciate, just as it happened between 2003 and 2008, and capital inflows into India surged. Therefore, when there is a demand for investors to buy the Indian government bonds denominated in rupees, then naturally the demand for rupees will increase, and everything else being equal, it will lead to a potential for the rupee‘s nominal appreciation,” he said.
This presents a challenge, too, according to him, as India would now need to ensure that the rupee stays competitive as demand rises.
“So, that is both a positive and a challenge because we have to make sure that the rupee stays competitive as well. So, in that sense, there is a potential for currency appreciation when index inclusion starts to happen and the demand from investors for Indian government securities starts to rise.”
In terms of borrowing, Nageswaran said that with everything else being equal, an incremental source of demand should see the Indian government’s borrowing cost come down, although he declined to quantify its magnitude at this stage.