Will long-term rewards of G-Sec inclusion in JPMorgan Index outweigh risks?

JPMorgan decided to include Indian government bonds in its Government Bond Index-Emerging Markets with effect from June 2024  (REUTERS)
JPMorgan decided to include Indian government bonds in its Government Bond Index-Emerging Markets with effect from June 2024 (REUTERS)


  • The inclusion in the JPMorgan bond index comes with both risks and rewards.

The range of reactions to JPMorgan’s decision to include Indian government bonds in its Government Bond Index-Emerging Markets (GBI-EM) with effect from June 2024 says it all. Predictably, markets are elated, policy makers, circumspect.

This is not surprising. Markets are not known to look beyond the immediate. Hence, the prospect of additional inflows into the government securities (G-Sec) market by investors based on the GBI-EM is enough to make markets swoon. Soon after JPMorgan’s announcement, the Indian rupee and 10-year bond prices jumped. The domestic currency opened at 82.83 against the US dollar, rising from its previous close of 83.09, and ended the day at 83.26. The 10-year bond yield fell 6 basis points to hit a two-month low of 7.101% from its previous close of 7.163 % only to close at 7.156%.

‘Irrational exuberance’? Remember, one of the biggest strengths of the Indian economy so far has been the limited exposure of our bond market to overseas investors. If the experience of the SE Asian crisis, and prior to that, the Latin American crisis, has taught us anything, it is that excessive exposure of local debt markets to fickle overseas investors and markets can bring the entire economy to its knees.

Apart from the fact that access to a larger pool of funds could prove a temptation to governments in search of easy money, large inflows and outflows linked to developments overseas can have an outsized impact on our relatively shallow and one-sided domestic bond and currency markets. Even if the debt is rupee-denominated, repayment requires externalisation or conversion of local currency into foreign currency, typically US dollars. Given thin trade in forex markets, additional safeguards will have to be put in place to minimise volatility in forex markets that could destabilise the economy.

Remember, high foreign holding of debt exposes Indian markets not only to external macro-economic shocks but also to geo-political risks. The recent experience of how Russia was ousted from international currency markets and the SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a cautionary tale of how geopolitics can impact financial flows and hence economic well-being.

This is why the Reserve Bank of India, (RBI) has all along, rightly, been less gung-ho about inclusion in the bond index, despite relentless pressure from foreign brokerages over the past few years. To the credit of the government, it has not capitulated on tax concessions sought by these brokerages as a precursor to India’s inclusion in the bond index and, interestingly, JPMorgan’s decision has come without government ceding ground on its sovereign right on taxation issues.

Remember, it is only G-secs that have been included in JP Morgan’s index, so, to assume there will be an increase in inflows and demand for Indian bonds and hence Indian corporates will be able to get money cheap is somewhat naïve. The problems of the corporate bond market in India go beyond easier access to overseas funding as seen by the limited investment by overseas investors in corporate bonds despite RBI allowing foreigners to invest. Unlike investment in G-Secs, the limit for investment in corporate bonds has never been reached.

Remember it is not so long ago that our equity markets were at the mercy of the ups and downs in India’s weightage in the MSCI (Morgan Stanley Emerging Markets) index. Today, due to the large presence of domestic investors in our equity markets (thanks in large part to investments through the SIP or Systematic Investment Plan route) that is no longer the case.

Consider what could happen if rating agencies decide for any extraneous reason to downgrade us. Institutional investors who invest in India based on our share in the bond index will immediately turn tail and exit without a second thought.

With JP Morgan taking the plunge, presumably, it is only a matter of time before India gets included in all three bond indices – JPMorgan EM index, FTSE EM index, and the Bloomberg Barclays EM bond index. But as with capital account convertibility, whose merits were long touted by none less than the International Monetary Fund, before it recanted in recent years, inclusion in the bond index comes with both risks and rewards. It is not clear that at our present stage of development, the rewards outweigh the risks. We need to be watchful. Our motto: ‘Cross the river by touching the stones’, an old Chinese saying that held that country in good stead during its reform process.


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