JPMorgan has announced the inclusion of India in its Government Bond Index-Emerging Markets (GBI-EM) index. This significant move could lead to billions of dollars pouring into the fifth-largest economy in the world, which is currently striving to finance its fiscal and current account deficits. The GBI-EM index and its suite, which global funds benchmarking around US$236 billion, will incorporate India’s local bonds.
This decision is a milestone for India, an economy exhibiting rapid growth on the global stage. It aligns with the country’s ambitious endeavour to enhance its global financial markets stature. JPMorgan stated that 23 Indian Government Bonds (IGBs), with a total notional value of US$330 billion, would be eligible for inclusion. All these bonds are fully accessible to non-residents.
India’s weighting is predicted to reach a maximum threshold of 10% in the GBI-EM Global Diversified and approximately 8.7% in the GBI-EM Global index. Following the announcement, India’s benchmark 10-year bond yield fell 7 basis points to a two-month low of 7.0788% in initial trade, but later climbed back to 7.12%. The rupee also appreciated 0.3% early to 82.25 per dollar, before slightly losing some gains to trade at 82.93.
India’s Chief Economic Adviser V. Anantha Nageswaran welcomed this development, highlighting it as a testament to the confidence that financial markets have in India’s potential, growth prospects, and sound macroeconomic and fiscal policies.
The process of inclusion will begin on June 28, 2024, and span over 10 months. Each month will witness a 1% increment in India’s index weighting, until it reaches the maximum 10% weighting. Madhavi Arora, the lead economist at Emkay Global Financial Services, opined that this move should structurally benefit rates and foreign exchange markets in the long run. It is expected to reduce the cost of borrowings for the economy and promote accountable fiscal policy-making.
On the flip side, India’s inclusion will lead to outflows in other countries as their domestic government bonds’ weightings will decrease. According to JPMorgan, Thailand will experience the largest loss at 1.65 percentage points. South Africa, Poland, Czech Republic, and Brazil will see their weightings reduced by 1-1.36 percentage points.
India initiated talks about its debt inclusion in global indexes in 2019 and began discussions with Euroclear about clearing and settlement. In 2020, as part of an effort to enter global bond indexes, it lifted foreign investment restrictions on some government securities, with several bonds now part of the “Fully Accessible Route” without any foreign investment restrictions.
However, issues including capital gains taxes and local settlement delayed the inclusion process. “We believe a total of US$20-25 billion should come in over the index inclusion horizon, but some front loading is reasonable,” said Rahul Bajoria, managing director and head of EM Asia (ex China) Economics at Barclays.
Foreign investor purchases in Indian bonds have remained subdued, with net acquisitions of US$3.4 billion so far in 2023. Foreign investors own less than 2% of outstanding government debt. Morgan Stanley estimated that this figure could now increase to 5%.
In the same announcement, JPMorgan stated that Egypt’s eligibility in the GBI-EM series will undergo a review for three to six months, due to reported “material” hurdles in currency repatriation. If these hurdles persist, a status review will be triggered for Egypt’s removal from the GBI-EM series. Egypt will remain in the index during the review.