The Indian government bond market is bracing for potential volatility after being excluded from a key global index, a development that could trigger significant outflows from foreign investors.
The snub arrives at a sensitive time for the Reserve Bank of India (RBI), which is set to announce its monetary policy decision this week.
Market participants are closely watching how the central bank will respond to the dual pressures of external capital flight and domestic inflationary risks.
The exclusion from the index is expected to force passive funds tracking the benchmark to sell Indian sovereign debt, creating immediate selling pressure on yields.
This structural headwind complicates the RBI's mandate to maintain financial stability.
While the central bank has previously intervened to support the rupee and manage liquidity, the scale of potential outflows from the index removal presents a fresh challenge to its policy framework.