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

India's weight in the index is limited to a maximum of 10 percent and eligible Government bonds valued at $330 billion

JPMorgan Chase & Co said on September 22 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.

We break down what it means for bond yields, equities and the rupee.

Foreign investment

Being part of a global bond index can attract foreign investors who use index-tracking funds and passive investment strategies. These investors typically follow the composition of the index closely, meaning that when a country's bonds are included, they automatically become part of many investment portfolios, attracting capital inflows.

India’s inclusion in the JPMorgan bond indices is likely to result in inflows of $21 billion over 10 months approximately.

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

Access to global capital

Inclusion in JPMorgan’s global bond index can increase India’s access to international capital markets. When a country's bonds are included in a widely tracked index, it becomes more attractive to foreign investors who seek to diversify their portfolios and benchmark their investments against the index.

This can lead to increased demand for a country's bonds, allowing it to raise capital more easily and at lower interest rates.

Currency stabilisation

When foreign investors buy Indian bonds, they will need to convert their currency into rupees. This will increase demand for the rupee and support its value.

The rupee has been a depreciating currency thus far. Sustained foreign inflows will help stabilise it, which will help greatly in improving India’s macroeconomic situation.

Lower borrowing costs

As demand for India’s bonds increases due to the inclusion, India may be able to borrow at lower interest rates. This can result in cost savings for the government and, in some cases, for private sector borrowers as well. Lower borrowing costs can free up resources for other public expenditures or investments.

Also Read: Rupee, bond prices opens higher after JP Morgan's inclusion of Indian bonds

Enhanced market liquidity

Inclusion in the global bond index can boost liquidity. A more liquid market can attract more investors, reduce transaction costs and provide greater flexibility for investors to enter or exit positions.

Increased visibility, credibility

Inclusion in a global bond index will enhance India’s visibility and credibility in the international financial community. It signals that the country's financial markets meet certain standards of transparency and stability, which can help build trust among investors and encourage them to allocate more capital to the country.