NEW DELHI: The much-awaited inclusion of Indian Bond in the international bond index is finally happening with JP Morgan all set to include Indian government bonds in the GBI-EM Global index suite and all relevant derivative benchmarks (including custom indices), starting 28 June 2024.
“India is expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD). Currently, 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are index eligible,” says a JP Morgan Global Index Research note.
The inclusion of Indian bonds will be staggered over a 10-month period starting 28 June 2024, through 31 March 2025. GBI-EM GD accounts for $213 billion of the estimated $236 billion benchmarked to the GBI-EM family of indices.
As per the index inclusion criteria, eligible instruments are required to have notional outstanding above $1 billion (equivalent) and at least 2.5 years remaining maturity.
According to JP Morgan, the inclusion of Indian bonds into the GBI-EM Global/Diversified indices is estimated to increase index yields by 33bps and 8bps, respectively, upon completion of the staggering process. The duration for GBI-EM Global and GBI-EM GD is expected to extend by +0.19 years (to 5.34) and +0.24 years (to 5.22), respectively.
Since India currently has a local currency debt rating of BBB- / BBB- / Baa3 (Fitch / S&P / Moody’s), Indian bonds are eligible for inclusion in the GBI-EM Global Diversified IG 15% Cap index. India is expected to have a weight of 14.59% in the index, which will be phased in over the 10-month period.
According to JP Morgan note, the Asia (ex-Japan) local currency bond index (JADE Global Diversified) will include India (over the same rebalance time frame as the GBI-EM GD), and it is expected to have a weight of 18.48%.
An Emkay Global report says that the inclusion of Indian government bonds in the JP Morgan global indices would result in passive inflows of $22-26 billion.
“Structurally, this will lower India’s risk premium/cost of funding, enhance the liquidity and ownership base of G-Secs and help India finance its fiscal and CAD. This will also imply more accountable fiscal policy-making ahead,” says Madhvi Arora, chief economist of Emkay Global.
However, she says the inclusion in the JP Morgan bond index does not immediately pave the way for inclusion in the FTSE and Bloomberg indexes, which have stringent conditions.
CEA V Ananth Nageswaran welcomed the development. "JP Morgan has made this decision on their own. It attests to the confidence that financial market participants and financial markets, in general, have on India’s potential and growth prospects and its macroeconomic and fiscal policies. Just as long-term equity investors have been amply rewarded by investing in Indian markets, so will long-term investors in Indian government bonds be," he said.