India gets green light to join JPMorgan bond index; rupee, bonds gain

JPMorgan will include India in its widely tracked emerging market debt index, setting the stage for billions of dollars of inflows into the world's fifth-largest economy and helping it finance its current account and fiscal deficits.

India's local bonds will be included in the Government Bond Index-Emerging Markets (GBI-EM) index and the index suite, benchmarked by about $236 billion in global funds, JPMorgan said in a release on Friday.

JPMorgan said 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion, all of which fall under the "fully accessible route" for non-residents are eligible.

"India's weight is expected to reach the maximum weight threshold of 10% in the GBI-EM Global Diversified, and approximately 8.7% in the GBI-EM Global index," said JPMorgan.

India's benchmark 10-year bond yield dropped 7 basis points to a two-month low of 7.0788% in opening trade but retreated to 7.12% by 0700 GMT, while the rupee gained 0.3% early to 82.25 per dollar before giving up some gains to trade at 82.93.

"We welcome this development," said India's chief economic adviser V. Anantha Nageswaran.

"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," he added.

Inclusion will start on June 28, 2024, and extend over 10 months with 1% increments on its index weighting, as India is expected to reach the maximum weighting of 10%, JPMorgan said.

"Beyond the near-term euphoria, this should structurally augur well for rates and FX markets, leading to lower cost of borrowings for the economy at large and more accountable fiscal policy-making," said Madhavi Arora, lead economist at Emkay Global Financial Services.

However, India's inclusion will trigger outflows elsewhere, with weightings for domestic government bonds issued by other countries set to shrink: Thailand will see the biggest losses at 1.65 percentage points, while South Africa, Poland, Czech Republic and Brazil will see theirs cut by 1-1.36 percentage points, according to JPMorgan.

Talks began in 2019

India began talks on including its debt in global indexes in 2019, while also talking to Euroclear about clearing and settlement.

It removed foreign investment restrictions on some government securities in 2020 as part of an effort to enter global bond indexes with several bonds now part of the "Fully Accessible Route" without any foreign investment restrictions.

But the government's stance on other issues including capital gains taxes and local settlement delayed its inclusion, though it did not actually budge on its stand.

"It would be reasonable to expect inflows to start from now, which in the interim helps even the demand-supply gap in balance of payments," said Rahul Bajoria, managing director and head of EM Asia (ex China) at Barclays.

"We believe a total of $20-25 billion should come in over the index inclusion horizon, but some front loading is reasonable."

Foreign investor buying in Indian bonds has remained tepid with net purchases of $3.4 billion so far in 2023. Foreign investors own less than 2% of outstanding government debt.

"This announcement is a significant positive for the INR bond in the short-term as investors look to front-run the eventual inclusion," said analysts at DBS in a note on Friday.

In the same announcement, JPMorgan said Egypt's eligibility in the GBI-EM series will be on review for three to six months, due to reports of "material" hurdles in currency repatriation.

"If the hurdles cited by benchmarked investors persist, a status review will be triggered for Egypt's removal from the GBI-EM series," JPMorgan said.

Egypt will remain in the index during the review.