Emerging debt market benchmark J.P. Morgan GBI-EM Index will include Indian government bonds starting June 28, 2024. It is expected to eventually attract around $25 billion in passive inflows into India.
However, as the 10 per cent weightage of Indian government bonds in the index will be implemented over 10 months, the inflows will be staggered over this period.
Further, there is a likelihood of the Indian government bonds being included in the Bloomberg Barclays EM index and FTSE Russell index, with experts estimating a total of $50 billion in inflows from these inclusions.
For context, the importance of a bond’s inclusion in a global bond index can be likened to a stock inclusion in Nifty index. Passive global funds track these global bond indices investing in their constituents without conducting specific research.
Notably, the JP Morgan GBI-EM Index, managing approximately $213 billion, has assigned a 10 per cent weightage to Indian bonds, signifying that as much as 10 per cent of passive inflows from funds tracking the index will flow into the Indian market in 10 months.
The inclusion of Indian bonds in the index is anticipated to result in the deepening of Indian bond markets. Experts believe that the yield on corporate bonds may decrease, leading to a reduced cost of capital for Indian companies. Additionally, as major buyers of Indian bonds, Indian scheduled commercial banks (SCBs) may stand to benefit from the boost to the Indian debt market.
According to Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, increased foreign inflows will lead to a reduction in bond yields due to a higher demand for Indian debt securities.
“This development signifies strong interest and positive sentiment, setting the stage for a more dynamic and inclusive bond market. For retail investors, these changes mean greater market stability, enhanced opportunities for diversification, improved liquidity, and potentially higher returns on their investments,” says Srinivasan.
Says Brijesh Shah, senior vice president and fund manager – fixed income, Bandhan AMC, “The Indian bond market will join the J.P. Morgan GBI-EM Global Series, with 29 Indian government bonds designated under the fully accessible route (FAR) included in the GBI-EM GD Index. For global investors, among the similar comparable EMs, the Indian market provides a very attractive opportunity with the highest duration and an above-average nominal yield in the index composition. Most of the inflow construes net incremental demand for Indian bonds, which gives strength to the government to continue expressing discipline on the fiscal consolidation path which they had demonstrated in the interim budget. We expect a strong re-commitment going forward.”
Shah said the resilience and macroeconomic stability of the Indian economy has made it an attractive investment destination, which may lead to larger bond allocations over time. According to Shah, this inclusion acts as a thrust for global investors to set up the machinery for investing in Indian fixed income, directly or indirectly.
Vishal Goenka, co-founder of IndiaBonds.com said the index inclusion was a watershed moment for the fixed-income markets in India.
Over and above the passive inflows, the index inclusion will pave the way for inflows to keep growing in the next few years. The index inclusion will expand the number of players in Indian debt market, thus improving market liquidity.
Global investors have been looking to allocate capital to emerging markets given their reluctance to invest in other large countries like Russia or China in the past couple of years. Hence, the timing of this index inclusion is perfect.
Goenka further said that though “investments will start via government bonds initially, it will filter into AAA to lower credit ratings in the coming years.”
