JP Morgan to include India to its Emerging Markets bond index
STORIES, ANALYSES, EXPERT VIEWS
JP Morgan Chase & Co will include Indian government bonds to its emerging markets bond index from June 2024, a much-anticipated move which could attract more foreign flows into the domestic debt market.
India will be included in the GBI-EM Global index suite starting June 28, 2024. India is expected to reach the maximum weight of 10 per cent in the GBI-EM Global Diversified Index (GBI-EM GD), JP Morgan said.
Currently, 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are index eligible.
“India has entered the GBI Global Diversified bond index with 10 per cent weight cap (maximum limit) and other smaller JPM EM indices, which will be achieved in a staggered manner over a 10-months period. This could prompt overall ~ USD26bn of passive inflows as a one-off stock adjustment over the scale-in period, while actual flows may be higher, depending on market dynamics,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services.
Several advantages: Inclusion in global bond indices will provide India several advantages including widening of investor base and stable passive flows.
The much-anticipated decision will reduce India's cost of borrowing as well as lead to passive inflows worth nearly $30 billion into the domestic debt market.
India's inclusion in one of the widely-followed bond indices will also help in making rupee more stable, keep interest rates lower, reduce bond yields and a resultant decline in the cost of borrowing will boost the bottomline of companies.
"This will reset the base rate for India and the yield should come down sharply. India's cost of borrowing will come down. Since Covid, the fiscal deficit in India has remained elevated due to higher borrowing. This event will ease borrowing pressure as a large part of the borrowing will be observed by this route. Banks' Treasury will be flushed with mark-to-market gains," said Mukesh Kochar, National Head - Wealth, AUM Capital.
The Indian rupee also stands to gain from the move due to a big dollar inflow due to buying of government securities.
"As far as the equity market is concerned it is positive for banks, NBFCs, leveraged companies etc. By and large it is a big macro positive for India," Kochar said.
India will enter the global bond index with a 10% weight cap and other smaller JPM EM indices in a staggered manner over a 10-month period beginning June 28, 2024. According to market experts, this could prompt around $30 billion of passive inflows.
Structurally, this will lower India’s risk premia/cost of funding, enhance the liquidity and ownership base of G-Secs and help India finance its fiscal and CAD, said Emkay Global's lead economist Madhavi Arora.
Most of the corporate bonds yields are benchmarked to the yields on government bonds. "Therefore, yields will decline pan India, across industries. The decline in the cost of capital will translate into higher profits for the corporate sector, which, in turn, will boost stock prices enabling the stock market to scale higher levels," said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
The passive inflow is likely to boost India’s profile on the world stage and further strengthen local fundamentals. "We believe the RBI could conduct sterilization operations during this inclusion period buffeting forex reserves and the currency. Based on this success, the government could notify additional bond series opening avenues for
long-term debt capital to fund India’s vast infrastructure and development needs," Axis Mutual Fund said.
India's bond market is the third largest after China among EMs, with a market cap of more than $1.2 trillion, nearly triple of Indonesia's and almost similar to Brazil's. FPI ownership of India G-Secs is <2% (3% FPI holdings in FARs), significantly lower than EM peers.
With the exclusion of Russia and troubles in China, options for global debt investors have narrowed down, analysts say.
The inclusion will also boost India's foreign exchange reserves. "Our forex reserves were at one time nearly $600 billion and they came down to about $550 billion odd a few months ago. But in the last six months or so, we recouped all those losses and we have come back to a reserve position close to $600 billion. So this would only further improve that," said banking industry veteran Keki Mistry.
However, JPMorgan's inclusion doesn't immediately pave the way for inclusion in FTSE and Bloomberg indexes, which have more stringent conditions related to FPI taxation and Euroclear.
"Changes to laws for taxing FPI capital gains, which would have helped India adhere to Euroclear requirements, were not a major impediment for India’s inclusion in the JPM index. However, this is still a major stumbling block for the Bloomberg indices, though not so much for the FTSE indices," Arora said.
The recent progress on resolving operational issues, such as posting margin requirements and extended settlement times, have been instrumental in India securing JPM GBI-EM inclusion. This was further bolstered by Russia’s removal, which made the index slightly more concentrated, with India’s inclusion helping to diversify holdings, the economist said.
