How will inclusion of Indian government bonds in the JPMorgan EM debt index impact rupee, bonds? Here’s what experts say
Experts believe this move will provide more investment options, lower India's cost of funding, and boost the bond market and the rupee.
JPMorgan will include Indian government bonds in its widely tracked emerging market debt index which may lead to inflows of billions of dollars into India. As per reports, quoting JPMorgan, India's local bonds will be included in the Government Bond Index-emerging markets (GBI-EM) index and the index suite, benchmarked by about $236 billion, in global funds.
The inclusion of Indian bonds will start on 28 June, 2024, and extend over 10 months with 1% increment on its index weighting, as India is expected to reach the maximum weighting of 10%, according to JPMorgan.
JPMorgan said 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are eligible for the inclusion. All fall under the category of "fully accessible" for non-residents.
Read more: JPMorgan to include India in its emerging market debt index, paving the way for billions in inflows
A giant step; positive for bond market, rupee
Experts hailed this decision of the inclusion of Indian bonds into the GBI-EM index and said bond investors will have more options now for investments. It will also pave the way for the bond market to grow its roots in India. Moreover, it is also positive news for the domestic currency as it will lower India’s cost of funding and help India finance its fiscal and CAD or current account deficit.
Madhavi Arora, lead economist at Emkay Global Financial Services believes this will lower India’s risk premia and cost of funding, enhance the liquidity and ownership base of government securities (G-Secs) and help India finance its fiscal and CAD.
However, Arora added that this does not immediately pave the way for inclusion in the FTSE and Bloomberg indexes, which have more stringent conditions (FPI taxation/Euroclear). However, it could have a demonstration effect in the medium term as the lower-risk premia could trigger positive externalities.
"In the near term, we expect bond yields and the Indian rupee to reverse gains after the initial euphoria, tracking global markets. However, the trend will again reverse in favour of bonds by March 2024, with the 10-year yield coming off well below 7%. For the second half of the current financial year (H2FY24), we see the USD-INR range at 82.25-84.25, with tactical RBI intervention keeping it in the middle of the EM (emerging market) Asia pack," said Arora.
It may have a positive impact on the domestic stock market sentiment and boost FPI (foreign portfolio investor) inflows into India.
“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' viewpoint and give up on their moody and poor standards. This inclusion will deepen the bond market in India,” said Nilesh Shah, MD of Kotak Mahindra Asset Management Company.
Rakeshh Mehta, the chairman of Mehta Equities said India’s inclusion in the JPMorgan emerging markets bond index is great news which would give a booster access to global investors to participate in the world’s fastest-growing large economy that would offer them the highest alpha returns in the emerging region.
"I believe it is after waiting for 10 odd years India has finally been included in the JPMorgan EM Bond Index today effective June 28, 2024. The credit goes to the Government of India regulator as well as various government organisations who made this possible in the current scenario," said Mehta.
"The news has come at the right time when the market is under pressure and hereafter the possibility of larger FPI flows could be seen ahead of this inclusion. The rupee would also benefit from this news. We continue to remain optimistic about a great Indian long-term story. Equity markets would take this as a welcome note at the right time,” Mehta said.
Churchil Bhatt, executive vice president and debt fund manager at Kotak Mahindra Life Insurance Company believes the announcement to include India’s bonds in the GBI-EM index will support both Indian bonds and local currency.
"We expect 10-year government bond yields to settle comfortably below 7% as we inch closer to the Index inclusion date,” said Bhatt.
Sandeep Bagla, CEO of Trust Mutual Fund said it is a small step for the index but a giant step for Indian bonds.
"It is a significant development for Indian bond markets. It will 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.
"It is going to be a staggered implementation starting June 28, 2024, adding one per cent weight every month, implying a potential monthly inflow of about $2 billion dollars. It is significant, but not immediate. The impact is positive, mostly for bonds with maturity greater than five years, so should lead to further flattening of the curve. This also paves the way for inclusion in other bond indices," Bagla said.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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