Financial reset on the horizon for India following JPMorgan bond index inclusion

In a significant development, JP Morgan Chase & Co has announced that it will include Indian government bonds (IGBs)  in its emerging markets bond index from June 2024, a much-anticipated move expected to invite further foreign investment into India's domestic debt market.

JPMorgan's inclusion of India in its influential emerging market debt index prepares the way for billions of dollars of inflows into India, the world's fifth-largest economy. It will assist the country in financing its current account and fiscal deficits.

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, which is huge. This will reset India's base rate, and the yield should decrease sharply. India's cost of borrowing will come down."

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.

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.

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

Also read: JPMorgan’s decision to add govt bonds to EM debt index will benefit these sectors, markets, economy; here’s how

"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. Banks Treasury 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 buying Gsec. Regarding the equity market, it is positive for Banks, NBFC, leveraged companies, etc. By and large, it is a big macro positive for India," said Kochar.

The investment banking company stated, "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."

Following this announcement, India's benchmark 10-year bond yield decreased 7 basis points to 7.0788 per cent, with this being the lowest level since July 27. Simultaneously, the rupee appreciated by 0.3 per cent to Rs 82.25 per dollar.

Market experts suggest that the inclusion of India into JP Morgan's GBI-EM Global index could potentially usher in over $26 billion of passive inflows into India.