(Bloomberg) -- India’s inclusion in a key global bond index will not be enough for Moody’s Ratings to upgrade the country from the lowest investment grade as it needs structural reforms to improve its fiscal metrics, according to a credit officer at the ratings firm.

“I don’t necessarily think that the bond market inclusion is going to be a material addition to the strengths that we already ascribed to the government’s ability to fund itself,” Christian de Guzman, senior vice president at Moody’s Ratings said in an interview Monday. “A strong growth and implementation of structural reforms that would result in the pickup in private sector investment will be key to improving fiscal metrics.”

De Guzman’s comments mirror global investors’ generally bullish outlook on the country that’s been layered with notes of caution about macroeconomic challenges faced by the South Asian country.  

JPMorgan Chase & Co. will include India in its emerging markets bond index in June, with the company estimating it may draw as much as $25 billion of inflows into the country’s debt market. Bloomberg Index Services Ltd. will also start including India to its emerging markets index from January. FTSE Russell has also put India on its watchlist for inclusion in its emerging market bond index.

India’s economy will be able to smoothly absorb large inflows after the inclusion, he said. “Our assessment of India’s government liquidity risk is actually already very strong as the nation’s large banking and insurance sectors are a reliable source of financing and actually a key credit strength.”  

But access to bond indexes will not lower India’s borrowing cost significantly as the inflows are relatively small compared to the general government debt of around $3 trillion, he said. 

Domestic macroeconomic factors — including policy rates and the country’s track record on inflation management — will impact yields, he said. 

Improving “debt affordability” will be an important parameter for a future upgrade in India’s sovereign ratings, he said. 

India has made progress on lowering its fiscal deficit in the last few years, but it continues to have high debt compared to peers, he said. 

Moody’s rates India at its lowest investment grade ‘Baa3’ with a stable outlook. The index inclusion and expectations of an upgrade come as India’s economy is expected to expand more than 7% in the current financial year that started in April — among the fastest in the world.

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