NEW DELHI: In a significant move that will set the stage for billions of dollars of foreign fund flows to India, global financial firm JP Morgan has decided to include Indian government bonds into its widely tracked emerging market debt index.
“India’s weight is expected to reach the maximum weight threshold of 10% in the GBI-EM Global Diversified, and 8.7% in the GBI-EM Global index,” JP Morgan said in a statement. Indian bonds’ inclusion will be staggered over a 10-month period from June 24, 2024, to March 31, 2025, indicating a 1% increment in its index weight. This will lead to passive inflows of around $25 billion.
Government Bond Index-Emerging Markets (GBI-EM) Global Diversified accounts for $213 billion of the estimated $ 236 billion benchmarked to the GBI-EM family of indices. According to the index inclusion criteria, eligible instruments are required to have notional outstanding above $1 billion and at least 2.5 years remaining maturity. Currently, 23 Indian government bonds with a combined notional value of $330 billion are eligible to be part of the index.
“JP Morgan has made this decision on its 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,” said India’s chief economic advisor V Anantha Nageswaran. Analysts see this as a positive move for the Indian economy as it ensures stable fund inflows, stronger rupee, and lower bond yields.
According to SBI Mutual Fund’s chief economist Namrata Mittal, the move creates an additional source to fund the current account and fiscal deficit. She, however, cautions that once the initial adjustment is done, there may be relatively higher volatility in the Indian bond market.
Debopam Chaudhuri, chief economist of Piramal Group sees the move in terms of freeing up of funds for private borrowers. “With additional foreign funds available through funds tracking the Bond Indexes, government borrowing may not crowd out private corporate borrowers as much as in the past,” he said.
According to Nomura, over the longer term, this could trigger other index inclusions, such as in the Bloomberg Global Aggregate Index, which could attract another $7-10 billion of inflows.
GBI-EM Global
China, Indonesia, Malaysia, Thailand, Czech, Hungary, Poland, Romania, Serbia, Turkey, Brazil, Chile, Colombia, Dominican Rep., Mexico, Peru, Uruguay, Egypt & South Africa are part of the index