After spending almost two years on the watchlist, JPMorgan Chase & Co. said in the early hours of September 22 that it will add Indian government bonds to its benchmark emerging-market index, buoying hopes of billions of dollars flowing into the nation’s debt market from overseas.
Policy makers and experts welcomed the move, which potentially gives global investors greater access to the world’s fastest-growing large economy that offers some of the highest returns in the region.
Economic affairs secretary Ajay Seth termed it “a welcome development showing confidence in the Indian economy.”
Chief economic adviser V Anantha Nageswaran said long-term investors in Indian government bonds would be amply rewarded, just as long-term equity investors in the Indian markets.
Talk of Indian government bonds getting included in global bond indices picked up recently, after an inter-departmental group of the Reserve Bank of India said in a report in July that the gains from adding these securities to global indices would be greater than the risks.
A report by BofA Securities further sparked speculation on the topic after it pointed out that the need for index providers to further diversify index constituents may lead to them going ahead with India’s inclusion despite frequently cited operational difficulties for smaller investors.
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Confidence in currency
“We welcome this development. JPMorgan has made this decision on their own. It attests to the confidence that financial market participants and financial markets, in general, have on India’s potential and growth prospects and its macroeconomic and fiscal policies,” Nageswaran added.
The inclusion of Indian bonds in JPMorgan's much-tracked Government Bond Index-Emerging Markets (GBI-EM) is crucial as it would improve confidence in India’s local currency, which has hovered near record lows of late.
"This is to phase in gradually from June next year. But it will improve confidence in the rupee and bring in more or relatively less volatile types of debt flows," Monetary Policy Committee member Ashima Goyal told Moneycontrol.
The securities will be added to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024. The South Asian nation will have a maximum weight of 10 percent on the index, according to a statement.
Former finance ministry policy makers said this could bring significant foreign inflows to the Indian debt market.
“It is an excellent development. Still better as it is happening without any undue concessions on the tax front. FPIs own about $25 billion of central government securities presently. Inclusion in the index will lead to about $30 billion of inflows,” former economic affairs secretary Subhash Chandra Garg told Moneycontrol.
Indian authorities had refused to change tax policies that would have made it easier for the securities to be added to global indexes.
Index inclusion follows “the Indian government’s introduction of the FAR (Fully Accessible Route) program in 2020 and substantive market reforms for aiding foreign portfolio investments,” the team led by JPMorgan’s global head of index research, Gloria Kim, said in a statement. Almost three-quarters of the benchmark investors surveyed were in favour of India’s inclusion, they said.
FAR enables non-resident investors to invest in specified government securities without any limit.
Hoping that other indices follow suit, former economic affairs secretary Atanu Chakraborty said, “This inclusion will bring in a lot of foreign capital, which will help corporates float their bonds with greater confidence in the rupee. It will increase the depth of the Indian bond market.”
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Euroclear requirements
However, Emkay Global economists Madhavi Arora and Harshal Patel said that India's reluctance to provide concessions on the capital gains tax imposed on foreign portfolio investors, which would help adherence to Euroclear requirements, could be a key stumbling block for getting added to the Bloomberg indices.
“Nevertheless, we do not think India will be in a rush to become Euroclear-compliant in the near future,” they said in a note on September 22.
Yet, others said JPMorgan’s move could trigger inclusion in more such indexes that may bring about further flows into the market. FTSE Russell, a major index provider, has the nation’s bonds on index watch for inclusion in its emerging market gauge.
“The announcement to include India’s bonds in the GBI-EM index will support both India bonds and local currency,” said Churchil Bhatt, executive vice president at Kotak Mahindra Life Insurance Company.
The entry of Indian government bonds in global bond indices could not have come at a better time, with hopes that it will bolster the Indian rupee when there are concerns over the current account deficit weakening with oil prices expected to remain elevated.
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