Malaysia Offers Valuable Lessons on How to Stay Together and Thrive

Political

Summary:

Sixty years after being 'put together', the country has fared well despite the challenges.

Sixty years ago, last Saturday, a country was born. However, the creation of Malaysia out of Britain's former colonial possessions in South-East Asia was of wider significance beyond its borders.

As one state joined and was then ejected within two years – Singapore – another almost joined, and then decided not to – Brunei. At the time, the president of a third – Indonesia – was so opposed to the formation of the new nation that he vowed to "crush" it only two months before its birth.

Other states around the world have been "put together" after empires receded. The case of Malaysia may contain lessons about how to keep together and thrive, despite mistakes inevitably being made along the way.

Not since the heyday of the Majapahit Empire in the 14th century had the peninsula of Malaya (as it was until 1963) been in the same polity as the Borneo states of Sabah and Sarawak, the other constituents of the newly formed Malaysia, along with Singapore. Then Indonesian president Sukarno had previously advocated that all these territories should be part of a "Greater Indonesia".

He denounced Malaysia as a puppet state set up by the British, a tool of neo-imperialism and neo-colonialism, and pursued a policy of "Konfrontasi" – confrontation, which led to armed skirmishes and hundreds of deaths, until the successor who ousted him, Gen Suharto, formally recognised Malaysia in August 1966.

A little more than a year before, another dramatic event had taken place.

The island of Singapore had historically belonged to the Malay sultanate of Johor, until Stamford Raffles established a trading post in 1819, with Britain taking full possession five years later. There were very strong links with the peninsula over the causeway. The University of Malaya was in Singapore until 1962, for instance.

Beside the cultural and geographical connections, there were doubts that the island would be viable on its own, and Singapore's founding father, Lee Kuan Yew, persuaded his Malayan counterpart, Tunku Abdul Rahman, that they needed to unite to fight the growth of communism.

But there were differences, too. Due to the large ethnic Chinese population in Singapore, ethnic Malays – who expected to wield power in "Tanah Melayu", or the Malay lands – were outnumbered by the Chinese in the new country.

The "Malay-type peoples" of the Borneo states were supposed to balance this out. But after race riots in Singapore led to nearly 30 deaths and hundreds of injured in 1964, it became clear that the ambitions of leaders in Kuala Lumpur, the national capital, and on the island were not compatible. Tunku Abdul Rahman determined Singapore had to go, and it was expelled in August 1965.

It was then, and still is, a remarkable occurrence in international affairs. As Prof James Ker-Lindsay of the London School of Economics and Political Science, an expert on secessions, puts it: "Singapore is the only state to have been created by being forced out of another country."

It wasn't the most promising of starts. This left the Malay peninsula with the Borneo states of Sabah and Sarawak, and by the end of the decade, Kuala Lumpur was struck by its own deadly race riots between ethnic Chinese and Malays, which have made the year 1969 a word of warning that needs no explanation in the country to this day.

How did Malaysia recover, eventually becoming one of the so-called "tiger cub" economies of the East? Ensuring a form of political quietism was one answer.

Any country where the majority race – in this case, the Malays – owned only 3 per cent of the wealth (as they did at the time of the riots), has to act to rectify what will naturally be seen as intolerable. From the early 1970s, positive discrimination to aid the Malays aimed to rectify the differential over decades, while it was understood there would be pathways to success and a role in politics for the Chinese and Indian ethnic minorities, whose culture, languages and religions would also be given space and protected.

This worked, by and large, until the conservative Barisan Nasional coalition, which represented all races, lost office for the first time at the 2018 general election. Radicals in the opposition tasted power for the first time. But the fracturing of a settlement in politics that had lasted for nearly 40 years also let the genie of Islamism out of the bottle. (This had previously happened in Indonesia when, after Gen Suharto fell from power in 1998, 42 Islamist parties were formed within three months.)

Although out of government, the Islamist PAS is now the biggest party in Malaysian Parliament.

The 2018 election also laid bare another issue that the country born in 1963 had never dealt with properly: how to ensure fair treatment of the Borneo states, whose populations are vastly different to that of the peninsula. They had loyally supported the Barisan Nasional for decades, contributing so many MPs to subsequent Barisan governments' majorities that they were known as "the fixed deposit" – not a very complimentary term – but broke away after 2018.

Realising their power as kingmakers in the fluid state that has led Malaysia to have five prime ministers in the past five years, Borneo's politicians are demanding far more from a central government that has long underinvested in Sabah and Sarawak while hoovering up billions from their natural resources.

The average visitor is unlikely to see it, but resentment at the peninsula's dominance has been growing for years, and I've seen it boil into open anger in discussions with Sarawakians in particular. More and more autonomy will be demanded, as no federal government will be secure without their backing.

As a shorthand, just know that "Malaysia Day" – September 16 – wasn't even a national holiday until then prime minister Najib Razak made it one in 2010.

"Nation-building" can seem like a term politicians bandy about overly casually. Looking at the differences that are now obvious in Malaysia shows how much it is still needed – as is the equitable treatment of all people in such a diverse country.

The political quietism of the past is gone. But if the goodwill, tolerance, laughter and friendship that I saw in the crowd that filled Kuala Lumpur's Merdeka Square on Saturday can become the order of the day – and not just on Malaysia Day – there's good reason to be optimistic for the future.

Over the weekend, my former colleague at the Institute of Strategic and International Studies Malaysia, Thomas Daniel, put it well in a tweet: "Here we are at 60, far from perfect, but worth every effort as we progress [and stumble] towards a better federation. And perhaps one day, a nation."

Source: The National News

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Damon

Economic

China's economic slowdown is polarising government advisers over the best way forward, with advocates of structural reforms now emerging from the shadows in a challenge to others calling for more state spending to shore up faltering growth.

The rare debate among advisers, who influence policy-making but do not wield direct power, comes as global markets scramble for clues on how authorities will halt a downturn that has left millions without jobs, forced investors to flee and the yuan to tank.

A dribble of piecemeal support measures from Beijing in recent months has raised questions about the tough choices China's new economic leadership now faces over whether to prioritise short-term relief or long overdue reforms.

Advisers calling for immediate stimulus argue the central government's low debt means it can shoulder the burden with municipalities to finance infrastructure and other spending to rev up activity. But pro-reform advisers argue the stimulus playbook that helped drive growth for decades has run its course and that bolder structural changes to the economy are now needed.

Both camps argue their proposals should be treated with urgency by policymakers, ahead of the annual Central Economic Work Conference, an agenda-setting gathering of top leaders expected in December.

"We need stronger stimulus policies and an overall plan, a package of macroeconomic policy measures," said Yu Yongding, an influential government economist who previously advised the central bank.

"China should issue more government bonds to finance infrastructure investment, including more investment in public facilities such as hospitals and old people’s homes. China should not be afraid of increasing its budget deficit-to-GDP ratio and government bonds-to-GDP ratio," Yu told Reuters.

China's central bank is constrained in how much it can ease monetary policy amid fears a widening interest rate gap with the United States would trigger capital flight and yuan falls, Yu said.

"We need to step up fiscal stimulus. There is room for the central government to step up spending given its sound fiscal position," said an adviser who spoke on condition of anonymity.

The central government's debt as a share of gross domestic product is just 21%, far lower than 76% for local governments, including their hidden debt.

China targets a budget deficit of 3.0% of GDP for 2023. Local governments are racing to issue the 2023 quota of 3.8 trillion yuan ($520.68 billion) in special bonds this month to fund infrastructure.

The pro-reform camp is beating the drum for faster structural reforms, including relaxing the system of residence permits, or "hukou", to spur consumption, removing market entry barriers for private firms at the cost of state giants.

Some are calling for reviving stalled market reforms amid signs of increased state controls in the economy.

International Monetary Fund Managing Director Kristalina Georgieva told Reuters over the weekend that the Fund plans to tell China to boost domestic consumption, rein in local government debt and clean up its bloated property sector.

"Policy stimulus is not effective and it's just a placebo," said one of the advisers.

Liu Shijin, an adviser to the central bank, said China must push reforms to unleash spending power of migrant workers who had entered cities, a view shared by former central bank head Yi Gang.

Reforms are urgently needed as growth engines such as property, exports and infrastructure are stalling, he said.

"If we continue to focus on macroeconomic policies to stabilise growth, the side effects will increase, and more importantly, the opportunity for structural reform will be missed again," Liu told a forum last month.

"It's not just macroeconomic policies that have short-term effects. Structural reforms with expansionary effects can also have immediate effects."

Tightrope

Despite the heated debate, analysts expect Chinese leaders can walk a tightrope between stimulus and reforms.

"China's current economic woes are caused by both cyclical and structural factors and, hence, require measures on both fronts," Tao Wang, chief China economist at UBS, said in a note.

The world's second-largest economy is showing some signs of stabilsing after a flurry of modest policy measures, but the outlook is clouded by a property downturn, aging demographics, high debt and geopolitical tensions.

The Asian Development Bank on Wednesday trimmed its growth forecast of China to 4.9% from 5.0% in July due to the weakness in the property sector.

While structural changes require political will, pro-reform advocates argue that without them, China will struggle to sustainably revive confidence in its economy, especially the private sector.

"We must return to the basis set by Deng Xiaoping, otherwise the economy won’t be good as overseas investors don’t have confidence," said Yi Xianrong, an economist at Qingdao University and former government adviser. "The economy is unlikely to pick up as long as private firms lack the confidence to invest."

($1 = 7.2982 Chinese yuan)

Source: Yahoo

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Devin

Political

When Gabon's General Brice Oligui Nguema ousted his distant cousin last month, he became the eighth military leader who has taken power by force in Africa since 2020. But one aspect about the country was different: it had sold a sizeable amount of bonds on international capital markets, and had just weeks prior sealed continental Africa's first debt-for-nature swap.

The putsch not only sent Gabon's bonds tumbling 10%, but also hit those issued by a number of other countries including neighbouring Cameroon, as jittery investors scanned for who might be next.

The apparent coup trend is adding to other major concerns deterring many investors from Africa - a wave of debt crises, tense geopolitics and an extreme vulnerability to climate change.

"Nearly all markets in that region are paying some price in terms of rising cost of debt," said Sergey Dergachev, portfolio manager at Union Investment. Counting the Cost of Contagion Fears from Africa Coups_1

Counting the Cost of Contagion Fears from Africa Coups_1

A UNDP study dated July shows how the costs add up. It estimated Guinea's 2008 coup and one in Mali in 2012 wiped a combined $12-$13.5 billion off the two countries' economies over a 5-year period. This represented 76% of Guinea's 2008 gross domestic product and almost half of Mali's 2012 GDP, the study calculated.

There have been scores of coups and attempted coups in recent decades including in Thailand, Ecuador, Egypt and Turkey.

Investors in those markets reacted reflexively - sell first, think later.

Gabon's coup not only hurt its bonds, it also ratcheted up the interest rate premium, or 'spread', investors demand to hold bonds in JPMorgan's multi-country "Nexgem" Africa index, a move that has still not fully retraced.

Cameroon has been particularly sensitive. Its bonds have lost more ground than Gabon's since the coup. The country's President Paul Biya has ruled for over 40 years through crackdowns and contested elections and wants his son to take over. Counting the Cost of Contagion Fears from Africa Coups_2

Counting the Cost of Contagion Fears from Africa Coups_2

In focus too is Senegal, whose President Macky Sall recently ruled out running for a third term after violent unrest, and Congo Republic which had to quash weekend rumours of an overthrow while President Denis Sassou Nguesso - in power for 38 years - was in New York for the U.N. General Assembly.

Unequal Coups

"Certainly, there's a lot of eyeballs on this (coup) theme right now," said Eamon Aghdasi, a sovereign analyst at investment firm GMO, who co-authored a recent paper on whether democracy matters to debt investors.

"As a bondholder, the worst-case scenario is that a new government comes in and repudiates the previous government's debt".

There is no sign of Gabon's new leaders repudiating debt, though payments on bonds have run into trouble elsewhere, such as Niger.

Credit ratings usually suffer too. Fitch and Moody's have put Gabon on a downgrade warning since the Aug. 30 overthrow. Agencies slashed ratings for Burkina Faso, Mali and Niger, although further afield, Thailand's never budged despite two coups in the last two decades.

"Coups, in general, in Africa or anywhere else, can cause problems for debt repayment partly because of the potential for sanctions," S&P Global analyst Ravi Bhatia said, adding that vital international support can also get shelved. Counting the Cost of Contagion Fears from Africa Coups_3

Counting the Cost of Contagion Fears from Africa Coups_3

Rising Costs

Gabon, where the Bongo family had ruled for nearly 60 years amid stark inequality, has yet to face the kinds of sanctions imposed on Mali, Guinea, Burkina Faso and Niger - although its International Monetary Fund programme was already off track.

Moody's cited the rise in oil prices in its decision to hold off on a full downgrade, as well as Gabon's membership of the Central African monetary union (CFA franc), which shields it from currency volatility.

The country's bond spreads have eased somewhat since investors' initial panic and could recover entirely, some analysts say, if it makes its first post-coup bond payment on time next month.

"You may get a situation where bondholders might say, if it's a change away from long-term single leaderships, then it may well be a turn for the better," said Simon Quijano-Evans, chief economist with Gemcorp. "As long as elections and democracy come back".

Broadly though, concerns about sovereign stability across Africa loom large. This year's "Fragile States Index" published by non-profit The Fund for Peace rated 46 African countries as at least somewhat unstable.

Even in Kenya, a solid democracy on the other side of the continent, investors warn that general risk aversion could push up the cost of issuing a new bond.

Source: SaltWire

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Samantha Luan

Economic

Flurry of data out from Japan

In Japan, we think solid consumption and service activity will likely support inflation staying above the 3% range. We believe that core inflation excluding fresh food and energy is expected to accelerate further in September with private service prices rising.

Meanwhile, thanks to strong activity in services, the jobless rate is expected to edge down in August. Industrial production in Japan will also likely rebound from the previous month's decline mainly due to a pick-up in motor vehicle production.

Sentiment in Korea likely on the downtrend

We think both consumer and business sentiment indices in Korea could deteriorate. Business confidence should weaken on the back of sluggish exports and growing uncertainty in the near-term economic outlook. For consumers, weak domestic equity performance and the recent tightening of mortgage measures might have hurt sentiment.

Singapore inflation to edge lower

Singapore reports August inflation next week. We expect headline inflation to dip to 3.9% year-on-year, down from 4.1%YoY from the previous month. Favourable base effects and softer growth momentum will likely translate to a dip in CPI inflation. Core inflation will likely be flat at 3.8%YoY.

Meanwhile, industrial production will likely still be in the red. We could see the tenth consecutive month of contraction for industrial production, tracking the sustained weakness of non-oil domestic exports (NODX). NODX recently posted another month of contraction as global trade grinds lower. Industrial production should stay challenged for as long as NODX is in contraction, with weaker industrial activity seen to weigh on GDP growth. Flurry of Data from Japan and Korea_1

Source: ING

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Kevin Du

Economic

China is building two-thirds of the coal-fired electricity generation capacity currently under construction globally, and this may not be as disastrous for the climate as it sounds.

The world's largest producer and importer of coal has 136.24 gigawatts (GW) of coal-fired generation under construction, according to data released in July by the Global Energy Monitor.

This represents 66.7% of the global total of 204.15 GW, and China is streets ahead of second-placed India, with 31.6 GW being built and third-placed Indonesia with 14.5 GW.

These three countries represent 89% of the coal-fired plants currently under construction, and it's not a coincidence that all of them have large populations, growing energy demand and vast domestic coal reserves.

China's under-construction coal generation is about 12% of its existing capacity, and adding more coal-fired power would seem incompatible with the stated goal of achieving net-zero carbon emissions by 2060.

But it's worth looking at China's overall energy demand, including its status as the world's largest importer of crude oil.

The large coal-fired construction programme can be seen in the wider context of China's rapid shift to electric vehicles and away from internal combustion engine (ICE) cars and trucks.

Sales of what China terms new energy vehicles (NEVs), which includes fully electric vehicles and types of hybrids, are surging, and accounted for 36.9% of total sales in August, according to data from the China Passenger Car Association.

A total of 1.94 million passenger vehicles were sold in China in August, the strongest month so far this year, with NEVs accounting for 716,000 of the sales.

Sales of NEVs have accelerated from under 5% of the total in January 2021, as car makers scaled up production, resulting in lower costs and improved availability.

It's likely that China will continue to push ahead with the rapid switch to NEVs, given its leadership in mass producing these vehicles and the batteries that power them.

There is also an economic reason for China to encourage the switch to vehicles powered by electricity as it lessens the reliance on imported crude oil.

China's imports of crude in the first eight months of 2023 were 11.4 million barrels per day (bpd), which if paid for at the current oil price would cost in the region of $250 billion.

It makes sense for China to cut its crude imports over time, as this lowers its import bill and reduces its energy reliance on countries such as Saudi Arabia and Russia, which have acted against China's economic interest by tightening oil supply to drive prices higher.

It makes sense from an economic and geopolitical perspective to power China's vehicle fleet using domestic electricity rather than imported crude oil.

Coal-Fired Cars

The question is then whether China can meet its climate goals by switching increasingly to NEVs, which will be powered by a coal-heavy electricity grid for decades to come.

China used coal for about 63% of its electricity generation in 2022, with hydropower coming in second at 14%, and other renewable energies such as wind generating 9% and solar 5%.

China is also the world's biggest installer of renewable power sources and is expanding its nuclear fleet as well, but coal is expected to remain the bedrock of electricity production, even as its share of generation gradually decreases.

But even using a predominantly coal-fired grid to charge NEVs is better from a climate perspective, insofar as an electric vehicle powered by a 60% coal-fired grid will produce lower lifecycle emissions that a similar ICE vehicle.

A model developed by the U.S. Department of Energy's Argonne National Laboratory shows that in a country with China's power generation profile, a battery electric vehicle will have to drive 78,700 miles (125,900 km) before being cleaner than an ICE equivalent.

However, the average car will drive about 170,000 miles in its lifespan, meaning that the electric vehicle ends up being better for emissions than the ICE equivalent, even if powered by a predominantly coal-fired grid.

While it would obviously be better for the environment for China to stop building coal-fired power plants and instead accelerate the deployment of renewables, there is some logic to the current policy.

Using mainly domestic coal and some relatively low-cost imports will allow China to lower crude oil imports over time, increase the penetration of NEVs and have a lower emissions profile than if it carried on with a predominantly ICE vehicle fleet.

Source: ET EnergyWorld

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Thomas

Political

Indonesia's elections next year are likely to spur deforestation as politicians seek campaign funds from businesses in return for easier access to rich natural resources, environmentalists say.

The Southeast Asian nation, the world's third-largest democracy, will hold a general election on Feb. 14, with regional polls planned for later in 2024.

"Next year's election is pivotal for Indonesia to determine the fate of the richest and most biodiverse forests in the world," said Annisa Rahmawati, a board member at Indonesian conservation group Satya Bumi.

She and other experts fear the soaring costs of campaigns - and little oversight of spending - will undercut rainforest protection.

Ward Berenschot, a professor in comparative political anthropology at the University of Amsterdam, said election campaigns in Indonesia are so expensive that politicians from local to national levels have developed "very close ties" with natural resource companies to help finance their ambitions.

"Measures to protect forests have been under pressure because helping campaign donors, or sometimes even family companies, to sidestep or circumvent (them) has been a way to fund campaigns," said Berenschot, who has researched the issue.

Nature-rich Indonesia has a third of the world's rainforests but large areas have been cleared in recent decades due to the expansion of crops like palm oil, as well as mining, pulp and paper expansion, and urbanisation.

Trees suck up planet-warming carbon dioxide to grow, but release it when they rot or are burned. Land use change, mainly deforestation, accounts for about 10-20% of global greenhouse gas emissions.

Indonesia's deforestation rates have slowed in recent years - helped by stricter policies and forest fire controls - but the Southeast Asian nation was still ranked fourth globally for primary tropical forest loss in 2022 by the nonprofit World Resources Institute.

Vote-Buying Widespread Despite Crackdowns

Vote-buying has become common in Indonesia's national elections over the last 25 years, despite crackdowns by the state corruption watchdog. A 2017 poll estimated that a third of voters are impacted by the practice.

After the presidential election in 2019, runner-up Prabowo Subianto - now the defence minister - initially refused to accept the result, with his party citing fraud that included vote-buying. The Constitutional Court dismissed his objections.

With current President Joko Widodo's second and final term due to end, candidates for next year's presidential elections include Prabowo, Central Java governor Ganjar Pranowo and former Jakarta governor Anies Baswedan.

Key voter issues include jobs, the economy, health care access, the cost of living, corruption, pollution and climate change.

Conservationists will be hopeful that Widodo's successor will build on the results his government has achieved in tackling deforestation and restoring mangroves, including making permanent a moratorium on primary forest clearing.

With a growing population of 270 million, Indonesia's elections are becoming increasingly expensive - leading to forests being used as an "ATM" cash dispenser by many parties seeking campaign finance, said Rahmawati of Satya Bumi.

This practice should stop "because it humiliates and ruins our progress in democracy ... destroying our environment and our economy", she said, adding that electoral candidates should be forced to publish the source of all their campaign funds.

Marcus Colchester, a senior policy advisor at the UK-based Forest Peoples Programme, said Indonesian politicians are often unwilling to regulate corporations because they depend on them for funds.

Those links often harm local and Indigenous peoples, whose land is sometimes granted to companies without their consent, he added.

"(The) double whammy - impunity and graft - becomes the main obstacle to social justice and environmental prudence," Colchester said. "Accountability and democracy are undermined, and natural resource governance made impossible."

Big Business Rules in Indonesian Politics

Berenschot at the University of Amsterdam said changes to legislation have often favoured big business. A 2023 decree seeking to boost jobs and investment, for instance, was criticised by green groups as weakening environmental protections.

"That close connection between business and politics also enabled certain policies and laws ... to be adopted, which risks accelerating deforestation," Berenschot said.

In addition, Indonesia's major political parties are often led by wealthy individuals and business owners, who may prioritise the economy over issues like the environment.

Politicians' campaign spending is hard to track and often lacks transparency.

Ten years ago, an expert survey among 500 local political observers found that a successful candidate for district head spent on average $1.5 million on campaigning, while an elected governor spent about $10 million, he added.

"For an economy where the minimum wage is about $300 per month, these are very big amounts of money," Berenschot noted.

After An Election, Forests Face Pressure

In election years, deforestation rates have slowed but then usually increased the following year, said Toerris Jaeger, director of the Oslo-based NGO Rainforest Foundation Norway.

"In the past we have seen that before the end of a government period, licences and permits in the forest and peatland area were being given to companies that provided or backed up campaign funding or that were tied into political parties that are running in the election," said Jaeger.

Failure to tackle the link between elections and deforestation will make it harder for Indonesia to reach its own climate goals related to reducing emissions from deforestation - and lead to more frequent natural disasters, he added.

"Transparency and accountability are necessary to break the link between deforestation and funding for political campaigns," Jaeger said.

Source: Devdiscourse

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Cohen

Economic

Bond

JPMorgan will include Indian government bonds in its Government Bond Index-Emerging Markets (GBI-EM) from June 2024, the Wall Street bank said on Friday.

The inclusion, a first for the country, could lead to billions of dollars of inflows into local currency-denominated government debt and bring down bond yields, while also providing some support for the rupee.

However, there is little direct impact expected on the equity markets.

What prompted the inclusion?

The Indian government began discussing the inclusion of its securities in global indexes as far back as 2013. However, its restrictions on foreign investments in domestic debt held that back.

In April 2020, the Reserve Bank of India introduced a clutch of securities that were exempt from any foreign investment restrictions under a "fully accessible route" (FAR), making them eligible for inclusion in global indexes.

Currently, 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are index eligible, JPMorgan said.

About 73% of benchmarked investors voted in favour of India's inclusion, it said. What India's Inclusion in JPMorgan's Bond Index Means for Its Markets_1

What India's Inclusion in JPMorgan's Bond Index Means for Its Markets_1

How large will the inflows be?

JPMorgan said Indian bonds will eventually hold a weight of 10% in its index, following 1% additions to its weightage each month from next June.

The inclusion could result in inflows of close to $24 billion over this 10-month period, analysts estimate.

This is significantly higher than the $3.5 billion invested by foreign investors in Indian debt so far this calendar year.

Foreign holdings of outstanding bonds could rise to 3.4% by April-May 2025, from 1.7% currently, analysts estimate.

What is the impact on bond yields, borrowing costs?

India's fiscal deficit remains high at a targeted 5.9% of GDP for the year ending March 31, 2024, which will result in the government borrowing a record 15 trillion rupees (about $181 billion).

So far, banks, insurance companies and mutual funds have been the largest buyers of government debt. An additional source of funds will help cap bond yields and the government's borrowing costs.

Traders estimate the benchmark bond yield will fall 10-15 basis points to 7% over the next few months.

Corporate borrowers will also benefit as their borrowing costs are benchmarked to government bonds.

However, increased foreign flows will also make the bond and currency markets more volatile and could push the government and central bank to intervene more actively.

What does it mean for the rupee?

Larger debt inflows from next financial year will make it easier for India to finance its current account deficit and reduce the pressure on the rupee.

Index inclusion-related inflows of close to $24 billion will cover a material part of India's $81 billion current account deficit, estimated for next financial by IDFC First Bank.

($1 = 82.8510 Indian rupees)