India’s inclusion in JPMorgan bond index could bring $23-bn inflows, says FM Sitharaman

Union Finance Minister Nirmala Sitharaman on Thursday said the inclusion of Indian bonds in JPMorgan's emerging market debt index could bring inflows worth $23 billion into the country.

Speaking at an event, the minister said: "It shows a prospect for $23 billion to come to India. That is the kind of impact that inclusion into the JPMorgan bond index means."

In September, JPMorgan Chase & Co. said it will add Indian government bonds to its benchmark emerging-market index from June 2024, which is a much-anticipated move expected to invite further foreign investment into India's domestic debt market.

As stated in a recent release by JPMorgan, India's local bonds will be incorporated into the Government Bond Index-Emerging Markets (GBI-EM) index and its index suite. These are benchmarked by approximately $236 billion in global funds.

"India's weight is expected to reach the maximum weight threshold of 10 per cent in the GBI-EM Global Diversified, and approximately 8.7 per cent in the GBI-EM Global index," said JPMorgan.

The process of inclusion is set to commence on June 28, 2024, and will span a duration of ten months. During this period, there will be incremental increases of 1 per cent in India's index weighting, ultimately reaching the maximum allocation of 10 per cent, as stated by JPMorgan.

According to JPMorgan, 23 IGBs with a combined notional value of $330 billion are considered eligible. All these bonds fall under the "fully accessible" category for non-residents.

JPMorgan Government Bond Index-EM Global diversified Index has assets under management of about $200 billion. A 10 per cent weightage on the index will mean that about $20 billion dollar will flow into these bonds.

India’s weight of 10 per cent will be staggered over 10 months, leading to passive inflows of $22 billion. The actual flows though may be higher, contingent on market dynamics and active flows.

This would also contribute to the roadmap for India’s growth of $5 trillion economy. But experts, however, said the inclusion may expose India to global market fluctuations, as it would become subject to shifts in sentiment, economic conditions, and policies in major economies, influencing bond prices and yields.

Mukesh Kochar, National Head - Wealth, AUM Capital, said: "This is great news and one of the long-awaited ones by the market. This JP Morgan index is $240 billion. India will be 10 per cent of it, which means $24 billion. This is huge."

"This will reset the base rate for India and the yield should come down sharply. India's cost of borrowing will come down. Since Covid-19, 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," Kochar noted.

"India’s inclusion in the bond index is a step in the right direction. With the exclusion of Russia and troubles in China, the options for global debt investors have narrowed down. Hopefully, rating agencies will respect investors view point and give up on their moody and poor standards. This inclusion will deepen the bond market in India," said Nilesh Shah, Managing Director, Kotak Mahindra AMC.

"JP Morgan’s inclusion of India in its Emerging Market Bond Index will reduce bond yields and the consequent decline in the cost of borrowing will boost the bottom line of companies," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

In a statement, HDFC said: "The inclusion could lead to passive inflows as index tracking funds increase their holdings in Indian bonds. According to estimates, this could be anywhere between $25-30 billion in the first year. As of now, 23 bonds worth a notional value of $330 billion are eligible to be added in the index in a staggered way over 10 months – 10% of this (maximum weightage) could therefore lead to close to $30 billion passive inflows."

(With agency inputs)

Also read: 'Sovereign borrowing costs may go down, could boost Rupee': CEA on India joining JPMorgan bond index

Also read: JPMorgan adds India government bonds to EM debt index

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