Come Friday, June 28, and Indian government bonds will mark their entry in the JP Morgan Government Bond Index – Emerging Market, marking a significant milestone that is expected to draw substantial global investment into India's debt market.
The index tracks the performance of emerging market bonds and the inclusion, which received approval in September 2023, will see India get an initial one percent weightage that will be gradually increased to 10 percent by March 31, 2025.
Experts view this inclusion as a watershed moment for India's fixed-income markets.
“This move puts Indian bond markets firmly on the radar of global investors,” says Vishal Goenka, Co-Founder of IndiaBonds.com.
“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.
Similarly, Shantanu Godambe, VP - Investments, DSP Mutual Fund, describes this development as a game changer for India's bond market dynamics.
“For the first time, foreign investors will be making long-term investments in India," Godambe explained.
“Previously, investments were largely for trading or arbitrage purposes, but now we anticipate a permanent allocation to India. This shift is likely to soften yields, although the extent will depend on the magnitude of incoming flows,” he said while adding that around Rs 10,000-11,000 crore has already entered this month, with monthly expectations averaging around Rs 18,000 crore.
“Some front-loading has occurred, and we anticipate an additional Rs 3,000-5,000 crore in the coming days. On average, monthly purchases are anticipated to range from Rs 12,000 to 15,000 crore,” he says.
Interestingly, the Indian government started discussing its inclusion in 2013, but it took over a decade to get to this stage.
According to Parijat Agrawal, Head – 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.
“Alongside passive inflows into government bonds, we anticipate active investment flowing into Indian bond markets,” he says.
Rupee impact
“I do not foresee significant impact on the rupee," says Godambe while expressing confidence in the ability of the Reserve Bank of India's to manage the inflows effectively.
“RBI has a strong track record in managing both inflows and outflows efficiently. While these inflows may influence global factors, we do not anticipate significant local repercussions,” he says.
Similarly, Deepak Ramaraju, Senior Fund Manager at Shriram AMC, expects the Indian rupee to strengthen by approximately two percent annually against major currencies even as large private banks could benefit from reduced borrowing costs and a stable macroeconomic environment.
Meanwhile, RBI Governor Shaktikanta Das had said in February that the central bank was confident of handling the increased foreign inflows into Indian government debt once they are listed on JPMorgan's bond indices.
Ramaraju estimates that the inclusion could attract between $20 billion to $25 billion in global flows into local debt over a phased 10-month period ending March 31, 2025. “Since the announcement last September, India's index-eligible bonds have already attracted $10.4 billion,” he says.
Experts further expect to see broader implications from India’s bond market integration, including improved debt sustainability and enhanced capital availability for Indian firms.
“This inclusion could potentially shift India's balance of payments into a structural surplus, fostering an environment conducive to lower-cost capital and economic growth,” added Ramaraju.
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