India’s economic pivot: The wide implications for asset allocation

India has moved from potential to program, from narrative to numbers. For allocators who think in decades, not quarters, the country now represents a structural exposure that can be sized, sequenced and stress tested rather than a tactical trade. The combination of targeted industrial policy, fiscal simplification, improving market access and a broadening domestic investor base is altering the calculus of global diversification in a period of geopolitical fragmentation.

A recent white paper from the Amundi Investment Institute, produced in collaboration with senior researchers at SBI Mutual Fund, documents this shift with granularity. The study, India’s great transformation, opportunities for global investor (it was led by Monica Defend, head of the Amundi Investment Institute), argues for a phased, policy-linked approach to allocation, noting that improved index inclusion, tax architecture and data governance lower operational frictions for foreign institutions.

The growth pillar is now policy backed. Since 2014, the Make in India framework has pushed domestic capacity in strategic sectors. Mobile handset imports that once met about three quarters of domestic demand have been replaced by local assembly and rising exports. Semiconductor projects under way total about US$18.2 billion in investment, aimed at closing the technology cost gap and securing critical inputs for electronics and defence. Defence procurement sourced domestically now accounts for about 60 per cent, supported by reforms that mandate local sourcing and enable private sector participation in design and production.

Consumption is upgrading as income ladders lengthen. Household demand is shifting from basics to discretionary categories, then up the premium curve within those categories. Entry level passenger vehicles have fallen from about 70 per cent of volumes in 2014 to about 31 per cent in 2025, while international departures by Indian nationals reached a new high of about 31 million in 2024. This pattern is reinforced by digital rails, cheap data and ubiquitous payments that pull demand into smaller cities along with the metros.

Tax reform is the quiet accelerator. A simplified GST now uses three principal rates, five per cent for essentials, 18 per cent for standard items and 40 per cent for sin and luxury goods. The reform is designed to cut compliance costs, correct inverted duty structures and stimulate consumption. The estimated fiscal cost, about 1.4 trillion Indian rupees (US$15.7 billion) or 0.4 per cent of GDP, is assessed as manageable in 2025–26 given buoyant non-tax revenue, with a higher multiplier than equivalent income or corporate tax cuts. The study adds that GST rationalisation should be disinflationary and could support a more accommodative monetary stance over time.

The diversification pillar is strengthening as global correlations splinter. The paper observes that average cross-country equity correlations have fallen since the pandemic and again after 2022 as supply chains, policy stances and currencies tilt towards regional priorities. In that regime, selective country weights can add value. Indian assets, equities and local bonds, exhibit relatively low correlation to world equity and to the global aggregate bond complex, a property amplified for foreign investors by INR exposure.

Expected returns compare well on a 10-year view. Using Amundi’s central scenario, Indian local government bonds are projected to deliver around 6.5 per cent in Indian rupees, which translates to about 7.5 per cent in US-dollar terms for the GBI EM India index once the long run currency contribution is included.

Indian equities are pencilled at about eight per cent annualised, the highest among the equity regions in the study, supported by earnings growth, albeit with higher volatility than developed peers. The Institute stresses that these are forward looking estimates, not guarantees, but the premia are meaningful at portfolio level.

Currency is a feature, not a footnote. The paper expects the rupee to appreciate by more than eight per cent in cumulative terms over the long run, which could lift unhedged Indian rupee asset returns by about 85 basis points. But the institute warns that unhedged volatility rises, to near 9.5 per cent for bonds and about 28 per cent for equities in their estimates. Full US dollar hedging carries a cost above one per cent a year, which can make blanket hedging uneconomical given the rupee’s relatively low standalone FX risk. The appropriate hedge ratio is therefore a portfolio design choice rather than a rule.

Market plumbing is improving. Indian government bonds entered JP Morgan’s GBI EM suite in 2024, broadening the passive buyer base and helping compress some historical frictions. Foreign portfolio investment processes are being streamlined from months to days, and bilateral tax arrangements via GIFT City and Ireland have reduced some withholding uncertainties. The paper cautions that taxation can still be less favourable than in competitor jurisdictions, yet the direction of travel is supportive, and the domestic buyer base is deepening.

On equities, domestic revenues anchor the factor profile. About 78 per cent of index level revenues are generated inside India, which reduces sensitivity to external trade shocks and helps explain the notably low correlation with Chinese equities. India is about 18 per cent of MSCI Emerging Markets by capitalisation, and the paper sees scope for that weight to rise by about five percentage points over the decade if earnings growth and market depth stay on track. Volatility remains higher than developed markets, near 25 per cent in Indian rupee terms in the model set, but the premium relative to developed markets has been trending lower.

Sovereign green program

Fixed income offers depth and an income tilt. The study places Indian local bonds towards the higher return end of the major bond categories, with correlations among the lowest to global aggregates and to broad EM debt baskets. Simulations show that inserting a five per cent sleeve of Indian local bonds into a diversified fixed income allocation with existing EM exposure lifted expected return and reduced overall volatility on a 10-year horizon. The steepness of the local curve, influenced by supply dynamics and changes in long end demand, provides additional opportunities for active duration management.

Sustainable finance is scaling from a small base. India’s cumulative GSS plus issuance reached about $US55.9 billion by end 2024, an increase of 186 per cent since 2021, led by green bonds and supported by the sovereign green program. A June 2025 ESG debt securities framework expanded beyond green bonds to cover social, sustainability and sustainability linked bonds, with mandatory third-party verification and alignment to global standards. The market is still one per cent of global volume, yet the regulatory scaffolding is now in place for institutional participation at scale.

Macro conditions remain supportive. The institute’s baseline forecasts GDP growth of about 6.6 per cent in 2026 and 6.3 per cent the following year. Tariff disputes with the US create near-term headwinds, although exports to the US have increased as a share of total shipments. Domestic demand is buoyed by tax relief, GST changes and a scheduled public sector pay review. Headline inflation is expected to average near the lower half of the target band, helped by food and energy dynamics, and the Reserve Bank has room to adjust policy as needed.

Geopolitics is handled with pragmatic multi alignment. India is leveraging Western diversification away from China while sustaining ties with non-Western partners. Recent trade agreements with the UAE, Australia, EFTA and the UK illustrate a blend of market access and investment linked commitments. Services exports have risen to more than US$375 billion, up from about US$220 billion in 2018-19, reinforcing India’s role in intangible trade even as manufacturing depth increases.

For institutional allocators, the paper’s practical guidance is unambiguous. Build a dedicated India sleeve, size it prudently, and phase entries using market access and policy milestones as triggers. In multi-asset portfolios with a 10 per cent volatility target, a balanced split between Indian equities and Indian local bonds improved expected returns by almost 15 basis points without raising volatility, holding overall EM exposure constant. As the paper puts it, investors should adopt an active allocation with rebalancing triggers tied to policy and market milestones.

Execution still matters. Equity selection should lean into domestic revenue leaders and sectors aligned with policy priorities in electronics, defence and capital goods, while respecting valuation discipline. In fixed income, curve positioning and SDL versus sovereign relative value can add incremental carry without sacrificing quality, especially given compelling real yields and improving liquidity. Currency policy argues for dynamic rather than static hedge ratios, calibrated to portfolio level risk budgets and term premiums.

In a period when the old 60:40 anchors have drifted, India offers a distinct return engine with a different set of risks. The institute’s summary line is worth repeating, without embellishment, because it captures both the opportunity and the discipline required. “A disciplined, phased approach to allocation, supported by improved market access and data governance, will allow investors to capture India’s long-term potential while managing near term risks.”

Nicholas Way

Nicholas Way is a contributing editor at The Inside Adviser and has covered business, retirement, politics, human resources and personal investment over a 50-year career.