Global financial services firm JPMorgan on Friday said it will add India to its widely-tracked emerging market (EM) debt index. Market watchers believe that the move will attract inflows from foreign portfolio investors and also benefit a couple of sectors including banks and NBFC.
JPMorgan added that 23 Indian government bonds with a combined notional value of $330 billion are eligible and the inclusion will start on June 28, 2024 and extend over 10 months with 1 per cent increments on its index weighting, as India is expected to reach the maximum weighting of 10 per cent.
On asking what does the addition mean to the Indian economy and stock market? Sandeep Bagla, CEO, Trust Mutual Fund said that this is a small step for the index but a giant step for Indian bonds. It is a significant development for Indian bond markets. This will also lead to higher allocation from FPIs, stable capital inflows, stronger rupee, and lower yields in general.
“More importantly, it marks a new era wherein India becomes a part of the global investment milieu and is a step towards India’s financial globalisation,” Bagla said.
He further added that it is going to be a staggered implementation starting June, 28, 2024, adding 1 per cent weight every month, implying a potential monthly inflow of about $2 billion dollars. It is significant, but not immediate. “Impact is positive, mostly for bonds with a maturity greater than 5 years, so should lead to further flattening of the curve. While there will be a 10-15 basis points rally, we don’t think it will extend beyond that immediately. The shorter end of the curve is anchored by RBI repo rates and tight liquidity conditions. This also paves the way for inclusion in other bond indices,” the market watcher said.
On the other hand, Mukesh Kochar, National Head-Wealth, AUM Capital said the move will reset the base rate for India and the yield should come down sharply. India's cost of borrowing will come down. Since Covid, the fiscal deficit in India has remained elevated due to higher borrowing. This event will ease borrowing pressure as a large part of the borrowing will be observed by this route. Banks’ treasuries will be flushed with mark-to-market gains.
“At the same time, it is a big positive for our currency as a big dollar flow will be there due to the buying of GSec. As far as the equity market is concerned it is positive for banks, NBFC and leveraged companies, among others. By and large, it is a big macro positive for India,” Kochar added.
Palka Arora Chopra, Director, Master Capital Services believes the inclusion of Indian bonds came at the right time as China's economy is facing weakness and slowdown. This will drive foreign investors’ interest towards India as India continues to maintain its GDP growth with inflation peaking out and a rebound seen in the rural economy. “The inflows will also lead to the lower borrowing costs for the government which will drive the capex plans of the government further,” Chopra said.
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