India set to enter JP Morgan’s emerging market debt index, allowing billions in inflows

Government bonds issued by India will be included in JPMorgan’s widely followed emerging market debt index. The world’s fifth-largest economy is projected to receive billions of dollars in inflows as a result of this inclusion.

As billions of dollars in foreign investment are expected to flow into the country, the move is expected to lower the cost of borrowing for the government, support the Ind rupee and bond markets, improve the nation’s credit rating, and help boost economic growth in Asia’s third-largest economy.

Beginning on June 28, 2024, the index provider will include the securities.

The largest US bank, JP Morgan, said this week that starting on June 28, 2024, local Indian bonds will be included in its Government Bond Index-Emerging Markets. The value of the Indian bond market exceeds $2 trillion.

“This inclusion is a major milestone in the country’s financial history,” Amitabh Mohanty, managing director and chief executive at Mumbai’s JM Financial Mutual Fund, says.

“It will add a fairly reliable low-cost source of foreign capital to Ind, which is very significant for a capital deficient country of our size and growth prospects. This will not only lower the cost of borrowing for the government but will also ensure pulling down the cost of capital for all asset classes, leading to easier funding and better liability structures for the Indian government and, by extension, for Ind companies.”

According to JP Morgan, India will eventually be brought in over the course of 10 months, reaching a maximum weight of 10% on the index. There are 23 Indian government bonds that are eligible, totaling $330 billion.

According to Kanika Bali, a partner at Optimyze Finance, an international professional services company with offices in Ind and the UK, India’s inclusion in JP Morgan’s index “is poised to exert substantial influence on India’s economic landscape.” It is “a favourable stride towards Ind economic advancement as it beckons foreign investments, strengthens the Indian currency and paves the way for Ind aspiration to attain a $5 trillion economy”.

According to her, the much-needed influx of foreign capital into Indian bonds can offer a sizable source of funding for both the government and enterprises.

Significant positive economic effects for the nation

The construction of roads, bridges, schools, and hospitals are just a few examples of the vital infrastructure projects that may be funded with this money.

The action may also be advantageous for the rupee in Ind.

According to Ms. Bali, when overseas investors purchase Indian bonds included in the index, they convert their foreign money, such as dollars, into rupees.

“This demand for the rupee increases its value, making it stronger against other currencies. A stronger currency is beneficial as it reduces the cost of imported goods and services for Ind,” she says. According to certain financial institutions, the estimated bond inflows throughout the inclusion period will be between $24 billion and $30 billion.

Bloomberg data shows that foreign investors have increased their holdings in index-eligible bonds from $7.4 billion at the end of 2022 to about $12 billion today.

According to commentators, the action highlights how important India is becoming as a market for international investors.

This is especially important now that investors are looking for alternatives to China and that some of India’s peer emerging markets are losing appeal due to underwhelming results.

According to Himani Chaudhary, CEO of Financial Vines, “Given the positioning of India in the world with respect to its global position, growing economy and countries shying away from investing in China and Russia, JP Morgan understood that this is the time to bring Indian bonds into the global market.”  

Another significant index provider, FTSE Russell, is also keeping an eye out for Indian bonds to be added to its emerging market index.

JPMorgan also stated that due to reports of “material” obstacles in cash repatriation, Egypt’s inclusion in the GBI-EM series will be reviewed for three to six months.

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