Here are the key things to know about inclusion of Indian bonds in JP Morgan index and what it means for India

In March 2024, Bloomberg announced that India would also be included in its EM Local Currency Government Indices, starting in January 2025.

India has officially joined the JP Morgan Government Bond Index – Emerging Market. Discussions for this inclusion began in 2013. Since JP Morgan announced India's inclusion nine months ago, eligible bonds have seen net purchases totaling Rs 841 billion ($10.08 billion), according to HDFC Mutual Fund.

Here are the key things to know about the inclusion and why it is so important.

What is the JP Morgan Government Bond Index - Emerging Market?

This index tracks the performance of emerging market bonds. India's inclusion, approved in September 2023, starts with a one percent weightage, gradually increasing to 10 percent by March 31, 2025.

Also read: India bonds in JP Morgan index: A watershed moment that will attract huge flows, aid growth, say experts

What bonds are eligible?

Indian Government Bonds (IGBs) issued under the Reserve Bank of India's 'Fully Accessible Route (FAR)' are included. These bonds are exempt from foreign investment restrictions and must have a minimum outstanding amount of $1 billion equivalent with at least 2.5 years of residual maturity.

What is the importance of this inclusion?

Experts view this inclusion as a watershed moment for India's fixed-income markets. According to Parijat Agrawal, Head of Fixed Income at Union Asset Management, the inclusion in the JPM Bond Index will have a positive impact on Indian government bonds and the bond markets overall, as demand is expected to outpace supply.

Similarly, Vishal Goenka, Co-Founder of IndiaBonds.com says, “This move puts Indian bond markets firmly on the radar of global investors.”

What does this move mean for investments?

Alongside passive inflows into government bonds, experts anticipate active investment flowing into Indian bond markets. “Initial investments are projected between $25-30 billion, with expectations for sustained growth in the years ahead. Investments will initially focus on government bonds and later expand to include AAA to lower credit ratings,” said Goenka. In a September 2023 report, analysts at Emkay Global noted that this move could draw new active investments, lowering risk premiums and funding India’s deficits. The move could enhance G-Sec liquidity and ownership, benefiting interest rates and FX markets, lowering borrowing costs, and promoting fiscal accountability.

“For the first time, foreign investors will be making long-term investments in India,” Shantanu Godambe, VP of Investments at DSP Mutual Fund explained. He estimates that around Rs 10,000-11,000 crore has already entered this month, with monthly expectations averaging around Rs 18,000 crore.

Overseas investment into government debt, HDFC MF noted, can unlock domestic financial resources for private sector investments within India, leading to economic growth. Experts predict an annual inflow of $30-$40 billion in foreign investments over the next 5 years, potentially freeing up an equivalent amount of domestic capital.

Also read: Explained: How will JPMorgan’s inclusion of India bonds impact debt mutual funds?

What could be the impact on borrowing costs and the Rupee?

Market participants do not foresee any negative impact on the rupee as the Reserve Bank of India is prepared to manage the inflows effectively. Deepak Ramaraju, Senior Fund Manager at Shriram AMC, expects the Indian rupee to strengthen by approximately two percent annually against major currencies. Large private banks could benefit from reduced borrowing costs and a stable macroeconomic environment.

What does this mean for foreign flows?

In February 2024, RBI Governor Shaktikanta Das stated that the central bank is confident in handling the increased foreign inflows into Indian government debt. Ramaraju estimates that the inclusion could attract $20 billion to $25 billion in global flows into local debt over a phased 10-month period ending March 31, 2025. India's index-eligible bonds have already attracted $10.4 billion since the announcement last September.

What could be the other benefits?

Experts expect broader implications from India’s bond market integration, including improved debt sustainability and enhanced capital availability for Indian firms. Ramaraju believes this inclusion could shift India's balance of payments into a structural surplus, fostering an environment conducive to lower-cost capital and economic growth.

What should one watch out for next?

In March 2024, Bloomberg announced that India would also be included in its EM Local Currency Government Indices, starting in January 2025.

HDFC MF notes that these inclusions will likely foster large overseas investments, reduce borrowings, and free up internal funds for infrastructure projects. "As India steps into the global financial arena, it must enhance project readiness and maintain sound economic policies to fully leverage these opportunities, remaining vigilant for global economic cycles," the report added.

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