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JPMorgan has announced the inclusion of Indian government bonds with a 1% weightage in the company’s Government Bond Index-Emerging Markets (GBI-EM) Global index suite from next year. The inclusion process is scheduled to kick off on June 28, 2024, and will unfold over the course of ten months. This development comes after several years of reforms and marks a significant achievement for the Indian bonds.
After the Indian government announced the removal of restrictions for foreign investors in the sovereign bond market in 2020, JPMorgan placed India on ‘watch positive’ for index inclusion. According to the US bank, India’s inclusion would lead to a more diverse and representative index by lowering concentration among greater-weighted countries.
At this point, only FAR (Fully Accessible Route)-designated Indian government bonds with a notional value of at least $1 bn and a minimum remaining maturity of 2.5 years will be eligible to join the index. Thus, at present, 23 bonds with a notional bond value of $330 bn are allowed for the index.
As time goes on, India’s weight will increase by one percentage point each month until it reaches its final index weightage of 10% by April 2025, at par with China and Indonesia. After this, Asia will comprise nearly 50% of the index. ‘India’s weight is expected to reach the maximum weight threshold of 10% in the GBI-EM Global Diversified, and approximately 8.7% in the GBI-EM Global index,” stated JPMorgan.
Following India’s inclusion, international investors can access the second-largest bond market in Asia which offers the highest yields in the region. “The initial response from the market to the index inclusion news has been positive: Indian bonds have outperformed other Asian local markets month to date by around 10-15 basis points*,” said Murray Collis, Chief Investment Officer, Fixed Income (Asia Ex-Japan) at Manulife Investment Management.
Experts differ on the impact of Indian bonds inclusion in JPMorgan’s EM bond index
Indian Finance Minister Nirmala Sitharaman stated that the inclusion of Indian bonds in JPMorgan’s emerging market debt index could bring inflows worth $23 bn into the country. Experts said that bond investors would have more options now, and the bond market will expand in India. Moreover, analysts also consider this as a positive development for the rupee as it will reduce India’s cost of funding and enable it to finance its fiscal and current account deficit.
“Once inclusion starts, inflows into the country’s government bonds are expected to total around $30 bn, or $3 bn per month, until India reaches its final weight,” believes Manulife’s Collis. He also added that this inclusion could attract greater foreign investment in India and could boost its long-term position in Asia’s fixed-income universe.
However, Fitch Ratings differs slightly in its analysis. It said, “We expect the positive effect on the sovereign rating of India’s inclusion in the JPMorgan Global Bond Index-Emerging Markets (GBI-EM) to be small, especially in the near term, as its impact on fiscal credit metrics is unlikely to be significant.” It explained that the inclusion in the indices could facilitate about $24 bn in passive inflows between June 2024 and March 2025. However, according to the credit rating agency, flows could be greater if other indices also include Indian government securities.
*Bloomberg, as of 28 September 2023.
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