Harnessing India’s Economic Momentum Through Strategic Bond Allocation
India bonds become too big to ignore
In this podcast, Yifei Ding and Cassie Tan discussed the drivers of growth in India and the implications of geopolitical risk and volatilities to Indian bond market. Listen the podcast to learn more.
Transcript
Welcome to Invesco Podcast on India. I’m Cassie Tan, a Client Portfolio Manager within the Invesco Asia fixed income team, and today I’m joined by Yifei Ding, the Senior Portfolio Manager in my team. Together, we’ll dive into the latest developments in India and the outlook on India Bond. Without further ado, let’s get started.
According to International Monetary Fund (IMF), India's GDP is projected to surpass Japan in the near future, making India the world's fourth-largest economy. Yifei, I know you have been covering India for many years with frequent site visits. Based on your observation, what are the drivers of the sustained growth in India?
Hi Cassie, thank you. I’ve paid visits to India on the annual basis in the past years. What impressed me the most is the vast scale of infrastructure developments, the livelihood of the young population as well as the clear policy direction of the government administration. We do see strong reasons for the country to continue its healthy economic growth with its large and young population, ongoing policy reforms, and increasing integration into the global economy,
Indian policymakers have been actively setting up national policies to boost economy growth. For example, the government launched the Make in India initiative in 2014 as part of a wider set of nation-building priorities. The initiative aims to transform India into a global design and manufacturing hub, as well as boost overall entrepreneurship and employment opportunities in the country. As a result of the advancement of the initiatives, we’ve witnessed sustained growths in India’s manufacturing and infrastructure sectors in the past decade. This has also led to a diversification of India’s exports.
Thanks Yifei , could you pls share an example about one of the fast-growing industries you mentioned?
Sure, take the ship-building industry as an example, and the same logic can be applied to many other sectors as well.
India is the home of 13 major ports and more than 200 other ports. Over the past decade, to meet the fast growth in international as well as domestic trades, port capacity has doubled, and cargo traffic has increased by 50%, growing at an average annual rate of 6%. (Source: Ministry of Ports, Shipping and Waterways, as of June 2025. ) The booming shipping industry creates demand for the ship building industry.
Global ship building is currently dominated by China, Japan and South Korea. However, both Japan and South Korea are projected to reach peak of highly educated nationals between 2030 and 2040.
Most countries climb up the supply chain via starting at simple manufacturing and gradually move up. The technology know-how is certainly very important but, in most cases, the favourable demographics are critical as well.
If India can continue to ready itself for further capacity building consistently, this rapidly expanding industry will create huge opportunities and contributes greatly to continued economic growth in India for the decades to come.
Thanks Yifei. The growth expectation sounds promising. However, with geopolitical risks and volatilities rising globally this year, what will be the implications to India assets, especially Indian bond?
India is quite well situated compared to most other parts of the world. India bond shows low correlation with other asset classes given the nature of the market. Coupled with India’s robust growth momentum, healthy corporate financials, and policy stability, we believe all investors need to include India bonds and other India assets in their global asset allocation considerations. You can no longer ignore India simply due to the sheer size of the economy in its current and future status.
Foreign ownership in many key industries remains relatively low compared to other major economies. The foreign ownership only accounts for around 3% of local currency government bonds (Source: The Clearing Corporation of India Limited, as of 25 June 2025), with an upward trajectory beginning in 2022. The relatively low level of foreign participation indicates significant potential for international investors to enjoy the high growth through investment in India bonds.
Thanks Yifei, let’s turning to monetary policy. Reserve Bank of India (RBI) delivered 50bps cut in June but changed the policy stance from accommodative to neutral out of market surprise. What is your take-away on this as an India bond investor?
We believe that the market has overreacted to the monetary policy meeting in early June. The RBI delivered 50 bps cut to the policy interest rate but turned from accommodative to neutral in its monetary policy stance. As the India Government Bond (IGB) yield curve bear steepened, we see good value and tactical opportunities in the belly to long end part of the curve. As inflation continues to trend lower, we do not see much risk of higher IGB yields in that part but expect it to compress in second half of Fiscal Year 26 when demand picks up from long end investors, offering attractive carry value and capital gain potentials.
Although we are in general agreement with the market expectation that RBI will not cut further in the remainder of the year, any growth slowdown due to global overhang may open up a window for RBI to deliver further cuts.
Thanks for tuning in to today’s Podcast on India economy and India Fixed Income. We hope you found the discussion insightful and valuable for your investment journey in the region. If you'd like to dive deeper into our insights, please visit our website or reach out to us to continue the conversation.
Investment Risks
The value of investments and any income will fluctuate (this may partly be the result of exchange-
rate fluctuations) and investors may not get back the full amount invested.
Important information
This document is intended only for Professional Investors in Hong Kong, for Institutional Investors and/or Accredited Investors in Singapore, for certain specific sovereign wealth funds and/or Qualified Domestic Institutional Investors approved by local regulators only in the People’s Republic of China, for certain specific Qualified Institutions and/or Sophisticated Investors only in Taiwan, for Qualified Professional Investors in Korea, for certain specific institutional investors in Brunei, for Qualified Institutional Investors and/or certain specific institutional investors in Thailand, for certain specific institutional investors in Malaysia upon request, for certain specific institutional investors in Indonesia and for qualified buyers in Philippines for informational purposes only. This document is not an offering of a financial product and should not be distributed to retail clients who are resident in jurisdiction where its distribution is not authorized or is unlawful. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorized person is prohibited.
This document may contain statements that are not purely historical in nature but are "forward-looking statements," which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Invesco does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Investment involves risk. Please review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
The distribution and offering of this document in certain jurisdictions may be restricted by law. Persons into whose possession this marketing material may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.
This document is issued in the following countries:
- in Hong Kong by Invesco Hong Kong Limited 景順投資管理有限公司, 45/F, Jardine House, 1 Connaught Place, Central, Hong Kong.
- in Singapore by Invesco Asset Management Singapore Ltd., 9 Raffles Place, #18-01 Republic Plaza, Singapore 048619.
- in Taiwan by Invesco Taiwan Limited, 22F, No.1, Songzhi Road, Taipei 11047, Taiwan (0800-045-066). Invesco Taiwan Limited is operated and managed independently.
India’s Development Vision and Economic Trajectory
In 2024, Indian Prime Minister Narendra Modi announced a bold vision to transform India into a developed economy by 20471. Achieving this goal would require sustained real GDP growth of approximately 7.5–8% annually over the coming decades - a trajectory that many view as ambitious. While we refrain from making a definitive stance on the attainability of this objective, we do see a credible case for continued robust economic expansion in the medium term.
Key government initiatives such as the “Make in India” are implemented to catalyse investment in infrastructure, boost domestic manufacturing and enhance export competitiveness. These efforts, combined with a large and young population, ongoing policy reforms, and increasing integration into the global economy, position India to capitalize on its long-term structural shifts. To shed new light on the topic, we present illustrative examples that are not commonly addressed by market participants.
Shipbuilding: A Rising Industrial Powerhouse
Historically, economies have advanced along the supply chain by starting with basic manufacturing and gradually transitioning to higher-value production. While technological advancement is often cited as the primary driver of this progression, favorable demographics play a critical - yet underappreciated - role in enabling sustained industrial upgrading.
Countries that experience rapid growth in shipping activity stand to gain significantly more if they also possess domestic shipbuilding capabilities. India exemplifies this dynamic. With 13 major ports and 200 minor ports, the country has seen its port capacity double over the past decade. Cargo traffic has increased by 50%, growing at an average annual rate of 6%. In FY 2024-25, major ports handled around 855 million metric tons (MMT) of cargo, showing an impressive annual growth rate of 4.3%2. The booming shipping industry is creating a strong demand for India’s shipbuilding sector.
Currently, global shipbuilding is dominated by China, Japan and South Korea. However, India is emerging as a competitive or even dominant player. Its highly educated population – defined as individuals with upper secondary and post-secondary education – has surpassed China’s in absolute terms and is growing at a faster pace. In contrast, Japan and South Korea’s highly educated populations are projected to reach their peak between 2030 and 2040. Favorable demographic dynamics suggest India is well positioned to gain increasing prominence in the global shipbuilding industry.
Source: Wittgenstein Centre, December 6, 2024.
Historical data shows a strong correlation between educational attainment and shipbuilding output. South Korea and Japan have a relatively high proportion of highly educated individuals. Their shipbuilding industries developed rapidly in the years when the number of highly educated population was increasing. From 2015 to 2025, China’s post-secondary education population grew while South Korea and Japan experienced declines, with South Korea’s growth rate falling below that of China. During this period, China’s shipbuilding industry expanded rapidly, while South Korea and Japan have seen a decrease in the gross tonnage of ships built. Looking forward, India’s post-secondary education population growth rate is projected to remain higher than that of China, Japan, and South Korea. After 2030, an expected deceleration in China’s post-secondary education population growth rate could pave the way for India’s shipbuilding industry to gain global traction.
Source: UNCTADstat. Data as of June 2025.
With diversification of shipbuilding locations, ample government support, and more high-educated labor force, India is becoming an attractive destination for South Korea and Japan shipbuilders. India’s shipbuilding industry is estimated to grow to USD 8 billion by 2033 from USD 1.12 billion in 2024, representing a compound annual growth rate (CAGR) of 25%3. According to the National Maritime Foundation, the shipbuilding industry exhibits an estimated investment multiplier as 1.824. If India continues to increase its shipbuilding capacity consistently, this rapidly expanding industry will create huge opportunities and drive broader economic growth in India.
National Defense Manufacturing: Strategic and Economic Leverage
Defense spending, typically accounting for 2-3% of GDP in major economies, is a strong driving force for economic growth. Many of the world’s leading countries have set clear targets in recent years to increase defense budgets. At the June 2025 North Atlantic Treaty Organization (NATO) summit, member states committed to ramping up defense and security-related expenditures to 5% of GDP by 20355, aligning with U.S. President Donald Trump’s aggressive goal of raising military spending to 5%. Italy has expressed its intention to gradually increase its defense budget to meet the NATO target. Other major economies - including Germany, Japan, UK, and France - have also outlined long-term plans to boost defense expenditure. However, India has not yet set a formal defense spending target, suggesting substantial growth potential in its defense sector as global security dynamics continue to evolve.
Source: Bloomberg, Invesco. The numbers are target numbers as of the year in parentheses. Data as of June 2025.
India is currently the world’s fifth-largest defense spender, with a 9.5% increase over the previous year. The sector is undergoing rapid growth, with over 4,000 new companies entering the market in the past year. Three Indian firms now rank among the world’s top 100 defense companies6.
India is one of the largest arms importers, accounting for 10% of total global arms imports.7 India’s defense manufacturing sector is undergoing a significant transformation, driven by the country’s ambition to achieve self-reliance and strengthen national security. The private sector is playing a leading role, supported by government initiatives such as the Atmanirbhar Bharat, which aims to boost domestic defense manufacturing. The Indian government and industry are expanding exports of defense products, targeting USD 6 billion in aerospace and defense exports by 2029. Early achievements are already visible – India ranks among the front runners in self-made weapons and is also “making for the world”. Companies like Hanwha and Airbus have established joint ventures in India to manufacture defense equipment. Additionally, Global Capability Centers (GCCs) based in India are actively developing software and digital solutions for major international defense manufacturers.
India’s defense budget is estimated to account for 1.9% of GDP in FY2025-268, with enormous room for growth. There are often demands for the Ministry of Defense (MoD) to allocate a higher share of the GDP to meet external and internal security challenges. According to various academic studies, India defense expenditure has a GDP multiplier of approximately 1.29. If defense expenditure rises to 3% or higher of GDP10, it could contribute over 1.3% to overall GDP growth.
Railway infrastructure: The Engine Behind Expansion
To achieve its ambition of becoming a USD 5 trillion economy, India is accelerating infrastructure development at an unprecedented pace. The government has launched the National Infrastructure Pipeline (NIP), along with several initiatives, to drive growth across the sector. In the Union Budget 2025-26, capital investment for infrastructure was increased to USD 128.64 billion – equivalent to 3.1% of GDP11. Infrastructure projects such as construction development, and townships have also attracted more foreign portfolio investments (FPI). Substantial advancements have been achieved across highways, railways, and airports, and intra-city infrastructure is also gaining momentum.
Indian railways achieved a historic milestone, transporting over 30 million passengers in a single day on November 4, 202412. However, India still has low railway length per capita. From 1995 to 2023, China doubled its railway length per capita from 0.052 meter to 0.112 meter. Although India saw higher total operating length of its railways, its railway infrastructure has not kept pace with its population, resulting in the current level similar to China’s in the 1990s. This gap highlights the urgent need for investment and development in India’s railway system.
Source: Bloomberg, World Bank, Invesco. Data as of June 2025.
According to the World Bank, India will need to invest USD 840 billion in infrastructure over the next 15 years to meet the demands of its fast-growing population13, representing a tremendous opportunity for growth.
India is investing heavily in railway construction to improve railway services and shorten travel time. One flagship project is the Mumbai–Ahmedabad High-Speed Rail Corridor, which will connect Mumbai in Maharashtra with Ahmedabad in Gujarat, spanning approximately 508 kilometers. Developed with Japan’s Shinkansen technology, the project is expected to be fully operational by 2028-29. The trains are expected to run at speeds up to 350 km/h, reducing travel time between the two cities from over 7 hours to just 2 hours14. It marks a significant step towards modernizing the nation’s transport infrastructure and connecting its major cities with world-class rail services.
Positioning for Investment: A Market Too Large to Ignore
India is undergoing a period of rapid economic development, notably in manufacturing sectors like shipbuilding and national defense, as well as infrastructure development, particularly railways. With its economy poised to become the top three globally, it is emerging as a market too large for global investors to ignore.
Source: Bloomberg, World Bank, International Monetary Fund, CNBC. Data as of May 2025.
Despite this, foreign ownership in key industries remains relatively low compared to other major economies. For example, foreign ownership accounts for only around 3% of local currency government bonds, though participation has been rising since 2022. This relatively low level of foreign participation indicates significant untapped potential for global investors to capitalize on India’s robust growth.
Source: The Clearing Corporation of India Limited, Invesco. Data as of June 2025
Amid rising geopolitical risks across the globe, India is comparatively well-insulated. Investing in Indian fixed income shows low correlation with other asset classes, providing diversification benefits. Combined with India’s robust growth momentum, healthy corporate financials, and policy stability, India presents a compelling case for increased allocation in global portfolios.
*With contributions from Daisy Wang
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
