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India is marking a significant milestone this year as JPMorgan Chase & Co. is including Indian government debt in its benchmark Emerging Market (EM) index. This inclusion, set to start in June, is expected to make India an attractive destination for bond investors.
The dialogue about including Indian securities in global indices commenced as early as 2013. However, tangible progress wasn’t made until April 2020, when the Reserve Bank of India introduced a “fully accessible route” for certain government securities, exempting them from foreign investment limits. The regulatory easing was a strategic move to attract more foreign inflows into India’s government bonds.
“The ongoing reform efforts and growing confidence in India’s ability to deal with risks are creating an attractive investment environment,” opines Kenneth Akintewe, Head of Asian Sovereign Debt at abrdn.
Bloomberg has also decided to include Indian bonds in its local-currency government indices starting January 2025.
There are 23 Indian government bonds with a combined nominal value of approximately $330 bn eligible for JPMorgan’s EM index. The firm will start with a 1% weight in June and then gradually increase this over ten months to a maximum weight of 10%.
JPMorgan’s global head of index research, Gloria Kim, told Bloomberg News that market feedback on India’s inclusion has been predominantly positive so far. Kim further said that the firm is on track to include India in its emerging market debt index.
The inclusion is expected to channel more foreign capital into India’s $1 tn sovereign bond market. According to data from the Clearing Corporation of India, although foreign involvement has been historically small, there has been a noticeable uptick in inflows in recent years.
“As expected, investors have been investing in this asset class ahead of the official index inclusion date. In the first four months of 2024, we saw strong inflows of $7 bn into the domestic Indian government bond market, compared to $8 bn in 2023,” Akintewe said.
The index inclusion not only enhances India’s visibility and appeal as an investment destination but also signifies a crucial step toward realizing its broader economic aspirations.
“If India is to realize its dream of becoming a developed economy by 2047, the centenary of independence, it will need to attract private capital to stay competitive and provide a high standard of living to its people,” wrote Laurent Gonnet, a Financial Sector Specialist at the World Bank, in a blog post.
“Now that more of government bonds can be bought by foreign investors, a larger share of domestic financial resources will be available for investment in avenues beyond Government Securities. Over the next five years, experts predict an annual wave of foreign investment of $30-40 bn, freeing up an equivalent amount of domestic capital for investment by the private sector,” he added.
For investors, India’s inclusion in global indices should provide diversification opportunities.
“With Indian government bonds offering a nominal yield of just above 7%, or roughly 2.5% in real terms on a forward-looking basis, the market is attractive from an investor’s standpoint, especially given India’s economic resilience to the external backdrop,” said Nafez Zouk, Aviva Investors in an April note.
“Overall, investments in the Indian government bond market offer investors the opportunity to benefit from a stable, high-yielding, and fast-growing market. The inclusion of India in JP Morgan’s benchmark index is also expected to lead to further inflows. All of this provides investors with new opportunities for diversification and stable returns in a market with long-term potential and undoubtedly makes India an appealing destination for bond investors,” abrdn’s Akintewe concluded.
