Benchmark bond yield may fall to 7% in H2 on inclusion in JPMorgan index: Experts

JPMorgan Chase & Co. will add Indian government bonds to its benchmark emerging-market index, a keenly awaited event that could drive billions of foreign inflows to the nation’s debt market.

The yield on 10-year Indian government bonds may ease to 7 percent in the second half of this financial year on the inclusion of the benchmark securities in JPMorgan Chase & Co’s key emerging-market index, experts said.

The addition of India to the index could result in inflows of $23.6 billion into government securities through the Fully Accessible Route (FAR) starting next year and completed by April or May 2025, IDFC First Bank said in a report. FAR enables non-resident investors to invest in specified G-Secs without being subject to any investment ceiling.

“The anticipation of index inclusion has already driven 10-year G-Sec yields to 7.14 percent levels yesterday and in the remainder of FY24 we could see yields moving towards 7 percent due to the announcement impact,” Gaura Sengupta, an economist at IDFC First Bank, said in a report on September 22.

Madhavi Arora, lead economist at Emkay Global Financial Services, reiterated that the trend will reverse in favour of bonds by the end of March 2024, with the 10-year yield coming off comfortably to below 7 percent.

JPMorgan Chase & Co said it will add Indian government bonds to its benchmark emerging-market index (GBI-EM) starting June 28, 2024. The decision has significant implications for India's debt market and global investors, with India's weight in the index limited to a maximum of 10 percent and eligible government bonds valued at $330 billion, analysts said.

Foreign portfolio holdings of outstanding G-Secs could rise to 3.4 percent by April or May 2025 from 1.7 percent in September 2024, the IDFC First Bank report added.

Madan Sabnavis, chief economist at Bank of Baroda, said the inclusion of bonds in the international index is good for India’s balance of payments and reserves can go up.

“This will, however, depend on how our current account deficit and other capital flows behave,” he said.

Also read: The pros and cons of India making it to JPMorgan EM bond index 

Immediate impact on yield

Soon after the inclusion was announced, the yield on the 10-year benchmark bond eased to 7.0930 percent at the open as against a 7.1443 percent close in the previous trading session. After this, some profit booking led the yield to rise to 7.1178 percent at 12:02 pm.

“The index inclusion rumors had helped India bonds to stay afloat even as most of the EM universe has followed a global bonds selloff since April. Thus, as the initial euphoria fades, the 10-year yield may reverse gains after having nearly reached our initial target of 7.05 percent by the end of September 2023, tracking global yields and Brent prices,” Arora added.

Sengupta said in the report that the real impact on government bond yields will be felt in FY25 when FPI inflows related to the index will start.

“Net G-Sec supply in FY25 is likely to be Rs 12 lakh crore, assuming a central government fiscal deficit of 5.5 percent of GDP,” Sengupta said.

Also read: MC Explains | What does JPMorgan index inclusion mean for India, investors

Another index inclusion

Some experts said the development could lead to Indian government bonds being added to other indexes.

“In the longer run, this could trigger inclusion from other similar indexes such as the Bloomberg Global Aggregate index, which may bring about further flows into the market,” said Churchil Bhatt, executive vice president at Kotak Mahindra Life Insurance Company.

The IDFC First Bank report said if India is included in the Bloomberg Global Aggregate Index, it could result in inflows of $15 billion to $20 billion, with India’s weight ranging from 0.6 percent to 0.8 percent.

“Given the relatively small weight, India’s inclusion could take place in one go, in case index inclusion takes place. Moreover, in the BGAI, the country’s weight will continue to rise as market capitalisation of FAR securities rises,” the report added.