India's Inclusion on Global Bond Market Index: A Game-Changer for the Indian Market

In recent years, India has been making significant strides in its quest to establish itself as a global economic powerhouse. One of the latest developments that garnered international attention is India's inclusion in global bond market indices, such as JP Morgan's GBI-EM and the possibility of inclusion in the Bloomberg-Barclays Global Aggregate Index and FTSE Russell World Government Bond Index. This move is a testament to India's economic growth and has profound implications for the Indian market and the country's standing in the global financial landscape. This article will explore how inclusion will work and its impact on the Indian market.

How does inclusion into the Global Bond Index work

JP Morgan has recently announced that it will be adding Indian government bonds to its emerging markets bond index starting from June 2024. The inclusion is expected to reach the maximum weight of 10% in the Government Bond Index (GBI) - Emerging Market (EM) Global Diversified Index (GBI-EM GD) and about 8.7% in the GBI-EM Global index. Currently, 23 Indian government bonds are eligible for indexing, with a combined notional value of $330 billion or Rs. 27 trillion. According to JP Morgan, these bonds will be included over ten months through March 31, 2025, with a gradual inclusion of 1% weight per month.

Analysts estimate that this decision can potentially attract approximately $25 billion into the country. Even ETFs tracking these global indices will need to rebalance their portfolio and invest in these bonds, resulting in more inflows.

According to the Index-inclusion criteria, eligible instruments must have a total face value of outstanding securities of over $1 billion (or equivalent) and at least 2.5 years left until maturity. Only IGBs that are designated under FAR are eligible for the index. Fully Accessible Route (FAR) is a separate channel that RBI introduced to allow non-residents to invest in specific government bonds.

By adding the higher-yielding Indian bonds, the overall yield of the index will be expected to increase a bit once the inclusion process is over...

What is the current scenario?

Foreign portfolio investors (FPI) have invested Rs 29,119 crore in India's debt market between January and September 2023. This marks a significant change from the same period in 2022, when there was an outflow of nearly Rs 9,069 crore. FPIs have started buying Indian bonds with optimism that India will be included in global bond indices, improving growth prospects, lower inflation compared to other economies and a stable rupee. In 2023, overseas investors have been net buyers of domestic debt for all nine months except March, when they sold Rs 2,505 crore of bonds. In contrast, in the calendar year 2022, FPIs had net sold Rs 15,911 crore of Indian debt.

Source: NSDL

The Impact and Significance of Inclusion

Inclusion on global bond market indices marks worldwide recognition and acceptance. It signifies that a country's financial market has matured and is now considered an attractive destination for international investors. This inclusion reflects India's efforts to liberalize its financial markets, making them more accessible and transparent to foreign investors. As a result, India's presence on these global indices carries several significant implications:

Impact on currency:

When there is an increase in the inflow of money into a country, the local currency tends to appreciate. With Indian bonds being included in the global bond index, there will be an increase in demand for the rupee. Assuming everything else remains constant, this could lead to a rise in the value of the rupee. However, this movement could be both positive and challenging at the same time. As the currency appreciates, we need to ensure that the rupee remains competitive with other currencies.

Broader investor base and impact on CAD:

Currently, Indian financial institutions are the largest purchasers of Indian bonds. However, if the proposed inclusion is implemented, the investor base will widen, and more investors can purchase Indian bonds. This increase in investment will also help to reduce the widening current account deficit (CAD). 

Inclusion in other global indexes: 

After India's inclusion in the JP Morgan EM Bond Index, its chances of being included in the Bloomberg Global Aggregate Index and FTSE Russell also rose. This can lead to an increase in inflow in the Indian market.

Higher volatility:

During times of uncertainty, higher foreign inflow can result in significant outflows, leading to increased volatility in bond yields and currency values. To minimize this effect, managing fiscal and monetary policies to tackle such volatilities is important.

Lower borrowing costs and high liquidity:

Inclusion in these indices typically lowers borrowing costs for the Indian government and corporations. When a country's bonds are included in global indices, they become more liquid and are considered less risky, which can lead to a decrease in yields. This, in turn, benefits the government by reducing its interest payments on debt and encourages corporate borrowing for investment purposes.

Enhanced Global Standing:

Being part of these indices elevates India's status in the global financial world. It reflects a vote of confidence in India's economic stability and growth prospects, positioning it as an increasingly attractive destination for international investors and businesses.

Conclusion

India's inclusion on global bond market indices marks a significant milestone in its economic development journey. The impact is evident through increased foreign investment, lower borrowing costs, enhanced liquidity, currency stability, and improved credit ratings. As India continues to open its financial markets to the world, it is positioning itself as an attractive destination for global investors. The long-term effects of this inclusion will be seen in India's sustained economic growth and its increasing influence on the global financial stage.