The inclusion of Indian Government Bonds (IGBs) in JP Morgan’s emerging markets bond indices will begin from Friday (June 28). The inclusion, which will be spread over 10 months until March 31, 2025, is likely to bring nearly $20-25 billion into the country, according to various estimates.
While these higher inflows will help India manage its external finances and boost foreign exchange reserves and the rupee, the Reserve Bank of India (RBI) will have to use the instruments in its armoury to check the resultant inflationary pressures.
What was JP Morgan’s announcement?
In September last year, JP Morgan had announced that it would include IGBs to its emerging markets bond index from June 2024. The decision was taken after the 2023 index governance review, it had said.
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“India will be included in the GBI-EM Global index suite and all relevant derivative benchmarks (including custom indices), starting June 28, 2024,” JP Morgan said. The inclusion of Indian bonds will be staggered into the GBI-EM Global Diversified Index (GBI-EM GD) over 10 months from June 28, 2024, through March 31, 2025, it said.
What would be India’s weight in the index?
India is expected to reach the maximum weight of 10 per cent in the GBI-EM Global Diversified Index (GBI-EM GD). A higher weightage will prompt global investors to allocate more funds for investment in Indian debt. Analysts expect $ 2-3 billion flows to India every month.
How many Indian Government Bonds are eligible for inclusion?
JP Morgan said there are 23 IGBs that meet the index eligibility criteria, with a combined notional value of approximately Rs 27 lakh crore or $330 billion.
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Only IGBs designated under the Fully Accessible Route (FAR) are index-eligible. In March 2020, the RBI, in consultation with the government, introduced a separate channel, called the FAR, to enable non-residents to invest in specified Government of India dated securities.
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As per the index inclusion criteria, eligible instruments are required to have notional outstanding above $1 billion (equivalent) and at least 2.5 years remaining maturity, JP Morgan said. “At the start of the inclusion on June 28, 2024, only FAR-designated IGBs with a maturity date after December 31, 2026, will be assessed for eligibility,” it said.
Any new index-eligible FAR-designated IGBs issued during the phase-in period will also be included.
What amount of flows can come to India?
According to estimates by some economists, India is likely to receive $2 billion to $2.5 billion every month during the 10-month period starting June 28. Overall, it is expected that $20 billion to $25 billion of flows would come into India due to the inclusion.
An HSBC report said IGBs have already seen inflows of $10.4 billion since the inclusion announcement on September 21, 2023. A large part of inflows is yet to materialise and this is likely to be led by benchmark issues, it said. So far in 2024, foreign portfolio investors have purchased $8.06 billion of Indian debt, according to National Securities Depository Ltd (NSDL) data.
What would be the impact of the bond inclusion?
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According to Madhavi Arora, Lead Economist, Emkay Global Financial Services, the move could lead to fresh active flows in the debt market, which remains underpenetrated on external financing.
It will not only result in lower risk premia, but will also help India to finance its fiscal and current account deficit (CAD), as well as enhance the liquidity and ownership base of government securities (G-secs; debt instruments issued by the central government to meet its fiscal needs), Arora said in a report in September last year.
The country’s current account balance recorded a surplus of $5.7 billion, or 0.6 per cent of gross domestic product (GDP) in the January-March 2024 quarter, as against a current account deficit of $1.3 billion, or 0.2 per cent of GDP, in the year-ago quarter.
Global rating agency Fitch Ratings said that the inclusion of certain Indian sovereign bonds in key emerging-market bond indexes managed by JP Morgan will support a diversification of the investor base for Indian government securities.
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Read | After JP Morgan, Bloomberg to include Indian bonds in EM index
It could help lower funding costs slightly, and support further development of domestic capital markets, but direct positive effects on India’s credit profile will be marginal in the near term.
Will higher inflows be a concern for RBI?
While higher inflows will boost the rupee, inflation is likely to come under pressure. When the RBI mops up dollars from the market, it will have to release an equivalent amount in rupees, putting pressure on inflation.
RBI Governor Shaktikanta Das has said the central bank has several instruments to manage surges in flows on account of bond inclusion. “We have managed it in the past. We will manage it this time also,” Das told reporters earlier this month.
Are Indian government bonds going to be included in any other global index?
After JP Morgan, Bloomberg announced this March that Indian government bonds will be included in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices from January 31, 2025.
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Indian FAR bonds will be included in the Bloomberg EM Local Currency Government indices with an initial weight of 10 per cent of their full market value on January 31, 2025, Bloomberg said.
The indices in the scope for inclusion include the Bloomberg EM Local Currency Government Index, the Bloomberg EM Local Currency Government Index 10% Country Capped Index, and all related sub-indices.
