What inclusion of India Bonds in the JP Morgan Index means

As per JP Morgan forecasts, non-resident holdings of Indian bonds are expected to nearly double from current 2.5 percent to 4.4 percent over the next year.

On June 28 2024, Indian bonds will be included in the JP Morgan Government Bond Index – Emerging Market (GBI-EM). An announcement to this effect was made in September 2023. This is a first for the country and will help deepen the Indian bond market.

The Indian government started discussing its inclusion in 2013, but it has taken a decade to get to this stage.

JP Morgan has indicated that eventually the index will hold 10 percent weightage of Indian bonds – adding one percent every month starting June 2024 and reaching the maximum weight of 10 percent by  March 31, 2025.

Building Bharat

So why is this news significant? India has ambitious goals to transform itself and needs to raise enormous amounts of funding.

The building of infrastructure, provision of last mile connectivity as well as bringing up the per capita income from across all strata of society; all this requires massive investment.

The government raises money through taxes and spends on these goals. However, this has limitations as excessive taxation could dampen the very economy it is trying to build. Government borrowing programmes (sovereign debt / bonds) provide an alternate source to raise money for these spends. Bonds or fixed income instruments are a key component of asset allocation along with equity. Deepening of the bond market allows the government to diversify its source of borrowings, bringing down costs as well as risks, and not crowding out private fund raised from limited domestic pools of capital.

The JP Morgan index inclusion creates a pathway for foreign investors to participate more actively in the Indian bond market. As per JP Morgan forecasts, non-resident holdings of Indian bonds are expected to nearly double from current 2.5 percent to 4.4 percent over the next year.

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Just the announcement of inclusion in the JP Morgan index has led to a jump in overseas investment in Indian sovereign bonds by over $ 10 billion as per government statistics. Goldman Sachs in a recent note indicated that as much as $ 40 billion could flow in over time.

What goes in the index

As per a Bloomberg article dated 19 June 2024, Indian government bonds have handed global investors a 4.5 percent return this year, trailing only Argentina in Emerging market bonds.

JP Morgan in a recent press note gave some additional details on what would be included. The average maturity of Indian bonds being included is approximately seven years, with Yield to Maturity of approximately 7.09 percent. Twenty-seven bonds are being included in the Index, the 7.18 percent benchmark 10-year government bond maturing in August 2033 will have the highest weightage of 0.59 percent. Two other bonds with weightage above 0.5 percent include the 40-year bond maturing in June 2053 and 13-year bond maturing in July 2037.

These are very liquid bonds. For example, the 40-year bonds have high demand from life insurance companies which try and match their assets and liabilities. These inclusions would further add to the depth.

A risk of foreign capital flows is that it could move out in times of crisis, leaving the country vulnerable. However, this seems adequately mitigated at this stage on account of a) robust forex reserves acting as a cushion, b) depth of foreign capital which would still be sub-5-percent and therefore, provide enough liquidity even if foreign investors wish to pull out some funds at some stage; and c) India growth rate which remains attractive and will help in attracting more diversified sources of capital in the months and years ahead, further reducing risk.

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Good for bond investors

The yields on bonds are attractive at this stage. Investors looking to build a debt / bond portfolio could add to the same as increased flows would eventually provide a downward pressure on interest rates. More importantly, it would provide a counter to the upward pressures (growth led as well as other factors such as higher for longer US interest rates, oil prices etc.) which could persist in an uncertain world.

In summary, inclusion of Indian sovereign bonds in the JP Morgan Government Bond Index – Emerging Market later this month would add the much-needed depth to the Indian bond market and could be the start of larger capital inflows on the debt side. These are indeed exciting times for the Indian bond market.