BackJPMorgan index inclusion to spur $40 bn in inflows
Govt bonds to be included in JPMorgan EM indices over 10 mths, starting 28 June
PremiumMumbai: JPMorgan Chase & Co.’s decision to include India as part of its emerging market global bond indices marks the end of nearly a decade of negotiations between the government and the international index provider, with the potential to draw inflows of more than $40 billion into Indian bonds over the next 18 months.
On Thursday, JPMorgan Chase announced that 23 Indian government bonds, with a combined nominal value of $330 billion, have been found eligible to be added to the Global Bond Index Emerging Markets Index (GBI-EM). The bonds will be included in the indices over 10 months, starting 28 June 2024, with 1% weight being added per month, and is expected to reach the maximum weight of 10% by 31 March 2025.
Economists and brokerages estimate this move will drive inflows worth as much as $40 billion over the next 18-21 months.
Goldman Sachs expects India’s inclusion to attract over $40 billion in bond market inflows within 18 months, with $30 billion from passive and $10 billion from active flows.
Both bond and currency markets cheered this much-anticipated decision. The yield on the benchmark 10-year government bond opened 8 basis points lower at 7.09% before closing at 7.18%. The rupee also appreciated against the US dollar on Friday.
India’s chief economic adviser V. Anantha Nageswaran, pointed out that JPMorgan “made this decision on their own".
The inclusion to the indices comes despite the government resisting changing the tax treatment for gains made by foreign investors from the sale of Indian government bonds, a major bone of contention between India and the index providers.
In its statement, JPMorgan said that the inclusion in GBI-EM follows the Indian government’s introduction of bonds that can be fully owned by foreigners in 2020, as well as steps to aid foreign portfolio investments.
A July report by an inter-departmental group of the Reserve Bank of India on the internationalization of the rupee said that the benefits of getting Indian government bonds added to global indices outweighed the risks.
Besides widening the investor base, inclusion in the global index will help India attract stable flows, which will, in turn, finance India’s relatively wide fiscal deficit. The assets under management of funds tracking the three major global bond indices (JPMorgan, FTSE Russel and Bloomberg-Barclays) combined is more than $5 trillion.
This will also lead to flattening of the G-Sec yield curve, appreciation of the rupee, reduction of overall borrowing costs and improvement in foreign flows to corporate bonds.
According to Barclays research, India’s prospects for getting into other major bond indices, such as the Bloomberg Global Aggregate Index and the FTSE Russell World Government Bond Index, however, remain low as they need Euroclearability for ease of settlement and a higher sovereign credit rating, which India does not appear close to.
Experts said the real impact on G-Sec yields will be felt in the fiscal year 2025 when FPI inflows start post the inclusion in the global index in July.
“India’s inclusion in a major EM bond index is a medium-term positive for Indian government bonds (IGBs). However, given the long lead time for index-related inflows and near-term headwinds (i.e., the rise in global crude oil prices, UST yields and expectations of “higher for longer" DM rates), the near-term gains in IGBs are constrained. Investors are likely to reassess the positive impact of inflows closer to the inclusion date," said Nagaraj Kulkarni, co-head of Asia rates ex-China at Standard Chartered Plc in Singapore.
“It is important to note that the decison is a consequence of investors asking for India to be included so they can participate in the India growth story," said Hemant Mishr, co-founder & CIO, S CUBE Capital. “The additional capital pool also means that the government can smoothly conduct its borrowing program next year and still have a higher capital outlay for infrastructure projects without distorting the bond markets," he added.
According to Kulkarni, emerging markets like China saw stable capital flows during the period of inclusion. However, investors constantly assess the macroeconomic conditions of the market to determine whether to allocate higher or lower than the benchmark weight.
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