India’s entry into J.P. Morgan index to mark a new chapter for domestic bond market
India becomes the 25th market to have found a place in this prestigious index since its launch in 2005. Inclusion of Indian government bonds will happen in phases over a 10-month period, with the addition of one per cent weight each month that started from June. After the inclusion is complete, weight of local government bonds will go up to 10 per cent in the index.
India’s economic clout on the global stage has been consolidating for several decades now and its entry after nearly two decades may appear a tad late but better late than never.
In September last year, J.P. Morgan had said that India would be included in its GBI-EM global index suite starting June 28, 2024, with the country’s bonds expected to reach a maximum weight of 10 per cent in the GBI-EM Global Diversified Index. It is a win-win situation not just for the domestic bond markets but for the index and for investors who will have the option of investing in a growing Indian market. It will also be instrumental in keeping the interest rates lower.
Eligibility of Indian Government Bonds (IGB)
Only those IGBs will be eligible for index inclusion which are classified under the Fully Accessible Route (FAR). On April 1, 2020, the Reserve Bank of India (RBI) had introduced the FAR route to allow non-residents to invest in specified government bonds without any restrictions. Within this subset of IGBs, there are currently 27 FAR-designated bonds which meet the index inclusion criteria. The bonds with the highest weightage in the index (over 0.5 per cent) consists of 7.18 GS 2033, 7.30 GS 2053, and 7.18 GS 2037.
India’s local debt stock is amongst the largest in EM, with the total outstanding of bonds included in the index standing over USD 400 billion — only surpassed by China.
As of December, last year, the total value of government debt or government bonds in the Indian bond market stood at Rs 161.1 lakh crore while that of corporate bonds was valued at Rs 44.2 lakh crore as of September 2023, according to media reports.
The inclusion is expected to bring-in inflows worth USD 25-30 billion on annual basis. This will increase the foreign exchange reserves for the country and will stabilise Indian Rupee. Not just this, it will bring down Indian bond yields and lower the cost of borrowing in India. As bond prices move opposite to the bond yields, the former will go up as the yields come down.
Indian corporates will be able to borrow money from the market at lower costs.
India was on the index watch since October 21, and now that it has been included, it has the single highest duration across the index at 7.03 years, with an above average yield-to-maturity at 7.09 per cent, a note released by JP Morgan explained.
Indian G-Secs’ inclusion will also increase Emerging Market Asia’s weight in the GBI-EM GD index and with this its weight is expected to account for nearly half of the overall index weight. According to the estimates made by JP Morgan, EM Asia’s weight in the GBI-EM GD is likely to go up to 47.5 per cent of the total index weight by 1Q25 versus from the current 40 percent.
The inflows into India will only grow with time as the investor appetite grows along with the addition of more players.
The market liquidity will also increase, benefitting market participants. Non-resident Indians, whose participation currently is at the lowest for Indian bonds in the emerging markets are expected to loosen their purse strings for the local bonds. Hopes are that they could begin with investing in Indian bonds listed on the JP Morgan index.
According to media reports, the non-resident holdings are currently at 2.5 per cent of the overall pie.
There is a big opportunity for Indian fund managers to quench the thirst of bond investors. The financialisation is increasing rapidly in the country with people exploring new avenues for investment. Unlike yesteryears, the options in fixed income instruments have increased manifold and not just the big-ticket investors like foreign institutional investors (FIIs) or foreign portfolio investors and mutual funds invest in them, the retail investors are also showing active participation.
Notwithstanding a slow start, where aggregate holdings of FPIs in the JPMorgans FAR suite of government bonds increased by just Rs 1,500 crore around the time of IGB’s inclusion, the overwhelming view is that the IGBs traction among investors would grow significantly going ahead though it could be incremental in the initial few months.
The lacklustre response on the first day was because of the hype that was generated in the run-up to its inclusion. Investors would be willing to wait till the announcement of the union budget.
While it may be slow, the domestic bond market could be on a cusp of greatness. Wait and watch!
