MUMBAI, June 26 (Reuters) - India's government bonds

will gradually become a part of JPMorgan's ( JPM ) widely tracked

emerging market debt index, beginning on Friday.

The announcement of the change was made in September,

setting the stage for billions of dollars to flow into the

world's fifth-largest economy.

Here are five things to know as the South Asian nation draws

more investment from global bond investors and its stock markets

attract increased portfolio inflows.

WHAT KIND OF INFLOWS?

Indian bonds should receive $2 billion inflows from

index-tracking funds around the June 28 inclusion date, followed

by a similar quantum each month and total inflows of at least

$20 billion over the next 10 months as the country slowly

reaches maximum weight in the index.

The market has received inflows from active fund managers

and other investors totalling $10.5 billion since September's

announcement, nearly six times the inflows received from early

2021 to August 2023.

About 32-40% of the expected $20-25 billion of index-related

inflows to India may have already arrived, JPMorgan ( JPM ) strategist

wrote in a note on June 25.

WHAT FACTORS ARE LURING FOREIGN INVESTORS?

Global investors are keen on India's high growth, the

government's commitment to fiscal prudence, the rupee's

low volatility and the central bank's pledge to bring inflation

down.

Foreign holdings of India's debt are around 2.4% of total

outstanding debt and JPMorgan ( JPM ) expects the level to nearly double

by the end of 2025.

India offers a positive real yield. Although lower than

other big emerging markets, its appeal is increased by a

backdrop of moderate and controlled inflation and that

government's commitment to fiscal prudence and low

currency volatility.

HOW WILL LARGE INFLOWS IMPACT THE RUPEE?

Any dollar inflows should boost the local currency, but a

large appreciation is not expected as the Reserve Bank of India

(RBI) is likely to absorb dollars and accumulate forex reserves.

At $652.9 billion, India's currency reserves are the fourth

largest in the world. This indirectly benefits the rupee as

large buffers allow the central bank to intervene and smooth

volatility.

The rupee, largely because of India's active central bank,

has been the most stable among major emerging market currencies.

"Lower volatility of the Indian rupee makes it an attractive

carry story," Sergei Strigo, co-head of emerging markets fixed

income at Amundi Asset Management said.

HOW WILL THE FLOWS IMPACT THE BOND MARKET?

Large foreign flows have pushed government bond trading

volumes to the highest in nearly five years.

In recent months, foreigners have started buying longer

tenor government bonds in the hope of better returns once the

RBI starts cutting rates later this year.

The larger long-end buying has led to further flattening of

India's yield curve with the 3-year to 40-year yield spread at

only 11 basis points.

Securities included in global bond indices do not have any

foreign investment limits.

WILL THE INCLUSION CHANGE MUCH FOR INDIAN ECONOMY?

The increase in inflows related to the inclusion, alongside

a moderate current account deficit, estimated at 1.1% to 1.3% of

GDP, is expected to keep India's balance of payments in surplus.

A larger set of buyers for Indian debt and the heavy inflows

will ensure yields are capped, but analysts say the government

may lose some of its budget flexibility as there will be greater

scrutiny of its finances.

The government's fiscal management will be watched closely,

said Vivek Kumar, an economist with QuantEco Research.

"Unwarranted indiscipline might involve higher cost for the

government."