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India's inclusion in JP Morgan EM Bond Index: What does it mean for India?

ICICIdirect 5 Mins 26 Sep 2023

After two years of monitoring, JP Morgan has made a significant decision to include India in its Government Bond Index-Emerging Markets, also known as GBI-EM index. In this article, we will look at how this move will help India, as it is expected to bring approximately $30 billion into the domestic debt market.

Inclusion Details

JP Morgan will start the inclusion process next year in June with a weight of 1%. The weightage will increase every month by 1%, and by April 2025, the overall weightage will go to 10%, with a monthly inflow of $3 billion to the domestic market. 

Earlier, such investments were not possible. However, the move has been supported by the government's introduction of the FAR program in the February 2020 budget and a leg up in market reforms for aiding foreign portfolios.

After the inclusion process is completed, the Indian market will become the second-largest emerging market country after China. Asia's exposure to the index will touch 50%. Some country's exposure will be reduced, with Thailand at 1.65%, Poland at 1.27%, Brazil at 1%, the Czech Republic at 1%, South Africa at 1.36%, Colombia at 0.78%, and Romania at 0.65%.

How will the inclusion benefit India?

Let us look at how the inclusion will benefit India. Below are areas of benefit for India:

Rupee to stabilize: As stated above, the inclusion will bring $30 billion to the Indian domestic bond market. To buy the bonds, the dollar has to be converted to a rupee, which will help to increase its value and eventually help stabilize the Indian rupee.

Lower cost of borrowing: The inflows will ensure that there is a reduction in borrowing costs for Indian corporates with the flow of foreign money. As per available data, the government mops 60% of the funds available in the debt markets domestically. It leaves very little for the corporates in the debt markets. The scarcity leads to higher costs of borrowing for Indian companies. Now that foreign investment is coming for government bonds, the domestically available capital for debt markets for corporates will increase.

Equity market to benefit: Foreign Institutional Investors (FII) closely track the dollar-rupee equation. If the rupee is expected to become stronger, their returns will be impacted. In such a case, they avoid investing in the Indian equity market. However, as mentioned above, the inclusion will stabilize the rupee, which will make Indian equity attractive to FIIs as it will sustain profit margins for them.

Also, with a lower cost of borrowing, the profits of Indian companies will increase because of higher margins. The better performance of Indian companies will attract more investors.

Downsides of inclusion in the index

As per market experts, the inclusion brings with it certain risks. Here are the key risks:

  • The inclusion can lead to volatility in global commodity prices, such as oil. 
  • There could be a deterioration in domestic fundamentals, i.e., high inflation or a slowdown in growth.

The final thought

With this inclusion, in the near term, it is expected that the 10-year benchmark government bond and rupee to outperform.  

Also, it opens the door for India's inclusion in other indices. For example, in coming years, India could become part of the Bloomberg Global Aggregate Index. It could attract another $10 to $15 billion, with India's weight ranging from 0.6% to 0.8%. 

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