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India bonds are likely to get included in JPMorgan’s emerging market bond index, driving billions of dollars of foreign money into the country’s government bonds in the coming years. The US-based bank recently opened discussions with fund managers on including India’s rupee-denominated bonds in the global index.
The country’s inclusion in a global bond index has been discussed extensively since 2019 when the Indian government approached JPMorgan and Bloomberg-Barclays to list its sovereign debt in global indices while initiating discussions with Euroclear for clearing and settlement.
India bonds get a boost from Russia’s exclusion
The case for India’s inclusion in the JPMorgan index has become even stronger as the bank removed Russian bonds after Russia invaded Ukraine. This gives additional incentive for index compilers to add Indian debt to their indices.
Last month, Goldman Sachs in a report said that India might enter the Government Bond Index – Emerging Markets with a 10% weightage, prompting $30 bn of passive inflows. “With Russia now removed from the index, the GBI-EM Global Diversified is concentrated in a few markets. Given its high nominal yields, depth and size, we think investors would welcome India from a diversification perspective,” Goldman analysts said.
According to Goldman, India’s government bonds being made accessible to foreign investors through the fully accessible route (FAR) will cause the country eligible to be a part of global indices by early 2023.
Late last year, Reserve Bank of India Governor Shaktikanta Das said that the inclusion of India’s debt in global indices was in the advanced stages of discussion and may happen in the next few months. Morgan Stanley in 2021 had said that India’s inclusion in the global bond index was imminent.
India has one of the largest debt markets among emerging markets with a total market capitalization of over $1 tn. However, the country has been unable to make it to global indices due to several reasons — government protectionism, capital control problems and issues with custody and settlement.
While India’s bond market is already open for foreign investors, the country has seen inflows of less than $40 bn over the past decade. However, inclusion in global indices is likely to bring inflows between $170 bn to $300 bn over the next decade, according to various estimates.
Currently, foreign ownership in India’s sovereign bonds stands at $17.8 bn. A recent Morgan Stanley note said that it expects India bonds to make it to the JPMorgan index by mid-September. The research firm added that while the announcement of the global index inclusion may not trigger inflows right away, it will improve investor sentiment. On the other hand, Morgan Stanley added that India could see monthly inflows of $3 bn in its sovereign bonds from the fourth quarter of 2023.
Meanwhile, apart from an opportunity for foreign investors to access India bonds, inclusion in the global bond index will support India’s high economic growth plans. “This will push India’s balance of payments into a structural surplus zone and indirectly create an environment for lower-cost capital and, ultimately, be positive for growth,” Morgan Stanley’s Chief India Economist Upasana Chachra said in 2021.
