Indian Bonds Gets Included in the JP Morgan Global Bond Index

Fantastic news unfolded today for Indian Government Bonds as we got included in the JP Morgan Global Bond Index.

JP Morgan, an index provider for widely tracked Emerging Market (EM) bond indices, announced the inclusion of Indian government bonds (IGB) to its Global Bond Index – Emerging Markets (GBI-EM) global index suites and all relevant derivative benchmarks starting June 28, 2024.

India’s current weight in these indices is zero. It will start at 1% and will increase by 1% each month to reach a 10% cap by March 31, 2025.

“There are three EM bond indices: the JPMorgan EM bond index, the FTSE EM index, and the Bloomberg Barclays EM bond index. This inclusion can make way for getting included in others as well. If that happens, we could see $40-$50 Billion Dollars inflows.

Which bonds are eligible?

Only IGBs issued by the Reserve Bank of India (RBI) under Fully Accessible Route (FAR) will be included in the indices.

Eligible IGBs should have a minimum outstanding amount above US$ 1 billion equivalent and have at least 2.5 years of residual maturity.

Based on that, all FAR-designated IGBs maturing after December 31, 2026 will be eligible. This amounts to ~Rs. 28 trillion worth of IGBs eligible for index inclusion as of Sep 20, 2023.

How important is this?

Very important. JP Morgan global bond indices account for US$ 213 billion worth of investments by global investors.

A 10% weight for IGB should attract ~US$ 21 billion (~Rs. 1.7 trillion) worth of investments in IGB by March 31, 2025, assuming investors have zero weight as of now and would like to be index neutral.

Furthermore, index inclusion by JP Morgan may also nudge the other EM index providers like Bloomberg, FTSE, etc. This will result in additional inflows in the economy.

How will it benefit India & IGB’s?

With the expected inflow into Indian markets in the form of dollars, the rupee should be appreciated. If other factors are also supporting like Crude oil, no major outflows from the Indian market, etc.

FPI investment in IGBs will increase gradually. At present, FPI investment in IGB is ~0.7 trillion. Incremental investment will diversify the investor base in the IGB market.

Most of this investment is likely to be in the passive form. Thus, will be mostly stable and long-term investment, in our view.

It is also to be noted that in the USA the 10-year Government yields are at about 4.5%. How much money do FPIs want to put into the emerging market bucket?

With Incremental flows starting in 2024, we feel the yields on the IGBs will head lower. And most of the economies are at the fag end of rising the rates. We might see rate cuts starting in about 6-12 months. If anyone is under-allocated on the debt side, decent times to add the duration above 5 years.

Disclaimer: The above is not any investment advice, please consult your advisor before taking any decision, as it depends on the risk profile of the investor.