JPMorgan inclusion improves chances of Indian bonds getting into Bloomberg index

JPMorgan has announced the inclusion of Indian government bonds in its GBI-EM Global index suite starting June 28, 2024.

The inclusion of Indian bonds in JPMorgan's Government Bond Index-Emerging Markets (GBI-EM) global suite has improved their chances of getting into indices such as that of Bloomberg.

"Post the inclusion into JPMorgan EM Bond Index, India's chances of inclusion into Bloomberg Global Aggregate Index (BGAI) also rises. In case 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," Gaura Sen Gupta, India economist at IDFC First Bank, said on September 22.

Also Read: JPMorgan's Indian bond inclusion sparks foreign investment surge

"Given the relatively small weight, India's inclusion could take place in one go, in case index inclusion takes place. Moreover, in BGAI country's weight will continue to rise as market capitalisation of FAR (Fully Automatic Route) securities rises," she added.

JPMorgan announced India's inclusion in the early hours of September 22, confirming market speculation around the decision. The announcement sent bond prices soaring, with the benchmark 10-year government bond opening at 101.15 rupees, or 7.09 percent yield, as against 100.63 rupees, or 7.17 percent yield, at close on September 21.

Bond prices and yields are inversely related — as the price of a bond goes up, the yield goes down.

Madhavi Arora, lead economist at Emkay Global Financial Services, does not think the JPMorgan inclusion paves the way for Indian government bonds becoming a part of other global indices such as those managed by FTSE and Bloomberg, which have more stringent conditions.

"Changes to laws for taxing FPI capital gains, which would have helped India adhere to Euroclear requirements, were not a major impediment to 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.

Also Read: JPMorgan's inclusion of Indian bonds to benefit all asset classes, says Ritesh Jain

"However, we reckon that India's inclusion in the JPMorgan GBI-EM could have a demonstration effect and the lower risk premia could trigger positive externalities in the medium term. For context, assuming that it eases capital controls and other barriers, India is estimated to receive a ~0.5 percent weight in the Bloomberg GAI, implying passive flows of ~$10 billion, given the estimated AUM of passive funds tracking the index," she added.

According to Sen Gupta, the inclusion of Indian bonds on the JPMorgan index could lead to foreign inflows of $23.6 billion into eligible government securities in the next financial year. Sen Gupta thinks the demand for Indian government bonds could exceed their supply by nearly Rs 1 lakh crore in 2024-25.

"Total demand from these three segments alone — banks, investors and index-related flows — would account for more than 90 percent net supply in 2024-25. Hence demand for G-sec (government securities) could exceed supply by Rs 90,000 crore next year," she said.

The government will borrow Rs 15.43 lakh crore on a gross basis this year.