JPMorgan’s India bond inclusion to bolster rupee, equities, but not just yet

Analysts feel India's addition to JP Morgan's bond index will also aid inflows to domestic equities, but its a long route before we reach the destination.

JPMorgan’s inclusion of Indian bonds in its emerging markets government bond index will bolster India’s bond, rupee and equity markets, but it will be a long wait before substantial funds begin to flow into Indian stocks and currency.

The long-awaited global bond inclusion of India’s sovereign bonds, commencing on June 28, 2024, can potentially draw as much as $30 billion of foreign inflows into the country. However, India might need to wait till the fund-flow is amped up to $40-50 billion a year through inclusion in other indices, for any meaningful gains to companies.

Stabilising rupee

Inclusion in a global bond index has the potential to lure foreign investors employing index-tracking funds and passive investment approaches. As foreign money flows in the domestic market to buy bond, it needs to be converted into the rupee which will also bolster its value and help in stabilising the depreciating currency.

"Inclusion in this global benchmark will support the rupee and broaden the buyer base for Indian bonds, enhancing demand diversification. Stable bond yields and a steady currency will positively impact India's economic fundamentals, making Indian assets, including equities, more attractive," said Ritesh Jain, co-founder of Pinetree Macro, trend watcher, and a strategic advisor.

A reduced fluctuation in Indian rupee also bodes well with foreign investors looking towards the country's equity market. This is because a fall in the local currency reduces the investment returns made by foreign institutional investors (FII) and a slowdown in the rupee's depreciation will help sustain profit margins for FIIs.

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Deepak Agarwal, CIO - Fixed Income at Kotak Mutual Fund, also highlighted that if foreign investors were factoring a steep depreciation in the Indian rupee while zeroing in on allocations to Indian equities, their expectations of a fall in the local currency will go away.

Lower cost of borrowing

The reduction in cost of borrowing for Indian corporates with the flow of foreign money into the debt market is another underlying positive from the move.  "The government typically mops up 60 percent of the funds available in the debt markets domestically. So, that leaves behind very little money for corporates in debt markets. This scarcity of capital generates higher borrowing costs for companies, when the supply goes down," said Debopam Chaudhuri, chief economist at Piramal Group.

"Now with foreign investors coming into the picture for government issuances, the domestically available capital in debt markets for corporates will increase. Thus, cost of borrowing will come down," he added.

Also Read | The pros and cons of India making it to JPMorgan EM bond index 

Chaudhari also believes that addition to more global bond indices will be needed to substantially lower the cost of borrowing for India Inc. "Only then $40-50 billion flows can come into India every year. With the JPMorgan inclusion alone, it will not be more than $12 to $15 billion," he said.

However, the inclusion to JPMorgan's bond index also solves that problem as it improves India's chances of making an entry into other indices such as that of Bloomberg and FTSE.

"After 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.

Also Read | JPMorgan inclusion improves chances of Indian bonds getting into Bloomberg index

Analysts at ICICI Securities also pointed out that India’s inclusion in the emerging market debt index would create an alternative source of financing and open up space for deepening of corporate bond issuers.

Equities: the final beneficiary

A stabilising currency, along with a lower cost of borrowing, will strengthen the fundamentals of corporates and bolster sentiment for foreign institutional investors, eventually supporting growth for assets like equities.

“This will have a positive implication for the economy as lower cost of capital will in turn benefit other asset classes including equities as value shifts from debt holders to equity holders,” said Pramod Gubbi, founder of Marcellus Investment Managers.

While Rajeev Radhakrishnan, CIO-Debt, SBI Mutual Fund does see JP Morgan's bond inclusion as a long-term positive for the domestic markets, he believes the trend in the near-term will not change much as capital (equity) flows, crude prices are still unstable.

"Net-net, for now, this is sentimentally positive but is it not going to move the needle for assets in the near term. Over a two-year period, it’s a clear positive," Radhakrishnan said.

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