In a long anticipated move, JP Morgan has said that it will include Indian government bonds in its widely tracked emerging market bonds index, a move that could drive huge inflows into the country and also increase its access to international capital markets.
India will be included in the GBI-EM global index suite starting June 28, 2024 and is expected to reach a maximum weight of 10 per cent in the global diversified index, JP Morgan said. As of now, 23 Indian government bonds with a combined notional value of $330 billion are index eligible, it added. The inclusion will be staggered over a period starting June 28, 2024, through March 31, 2025.
The move will be positive for India on several fronts. One, it will lead to huge foreign fund flows into India. This will help deepen the bond market. As more foreign investors buy Indian bonds, the rupee could also appreciate. India's fiscal deficit has been high post Covid-19. The incoming flows could help ease the pressure on borrowing too.
"This move is expected to garner approximately US$25 billion of inflows into Indian Government bond markets. In the longer run, this could trigger inclusion from other similar indexes, such as Bloomberg Global Aggregate index, which may bring about further flows into the market," noted Churchil Bhatt, executive vice-president and debt fund manager at Kotak Mahindra Life Insurance.
Apart from the passive flows owing to the one-time stock adjustment, this move could lead to fresh active flows in the debt market, which remains under-penetrated on external financing, feels Madhavi Arora, lead - Economsit at Emkay Global Financial Services.
"This will not only result in lower risk premia, but also help India to finance its fiscal and CAD (current account deficit) as well as enhance the liquidity and ownership base of G-Secs," said Arora.
Beyond the near-term euphoria, it could structurally augur well for rates and foreign exchange market, leading to lower of cost of borrowings for the economy at large and more accountable fiscal policy making, she added.
Axis Mutual Fund also believes the inclusion could drive $25 billion to $30 billion in flows over the next 18 months.
"Passive trackers of the above indices hover at around $250 billion. The staggered approach implies an inflow of $1.5-2 billion per month in the 23 identified bonds," it said.
Reports say that another major index provider FTSE Russel also has Indian bonds on index watch for inclusion in its emerging market index.
India's inclusion in the bond index is a step in the right direction since the options for global debt investors had narrowed down with the exclusion of Russia and troubles in China, pointed Nilesh Shah, managing director at Kotak Mahindra Asset Management Co.
"In the medium to long term, enhanced foreign participation could result in reduced yields on government bonds. That, in turn, may gradually reduce the yields on corporate bonds too, which in turn, could lead to reduction in cost of capital and cost of borrowing over the long term," said Shantanu Bhargava, managing director, head of discretionary investment services at Waterfield Advisors.