JPMorgan Inclusion Sparks $40 Billion Rush Into Indian Bonds
JPMorgan’s landmark decision to incorporate India into its influential emerging market bond index has unleashed a significant wave of foreign investment into Indian government debt. Analysts project that this inclusion could result in over $40 billion in inflows, signaling a transformative moment for India’s financial markets.
In September 2023, the U.S. banking giant announced plans to integrate 23 Indian government bonds, valued at $330 billion, into its Government Bond Index-Emerging Markets (GBI-EM). This inclusion process, set to commence in June 2024, will systematically increase India’s weight in the GBI-EM index, ultimately reaching a 10% cap over a ten-month period.
The GBI-EM index, a $236 billion benchmark, will thus see India become a significant component, granting global investors substantially greater exposure to the world’s fifth-largest economy. The step-by-step inclusion will boost India’s weighting by 1% monthly until the 10% threshold is achieved.
“This is great news and one of the long-awaited ones by the market,” remarked Mukesh Kochar, National Head of Wealth at AUM Capital. “This JP Morgan index is $240 billion. India will be 10% of it, which means $24 billion. This is huge.”
Substantial Passive Inflows Anticipated Analysts anticipate that JPMorgan’s inclusion alone could channel between $25-30 billion in passive inflows, as funds tracking the GBI-EM index adjust their portfolios accordingly. If other prominent index providers such as FTSE and Bloomberg decide to follow JPMorgan’s lead, the total inflows could surge to an impressive $50 billion.
“As Indian bonds become more accessible to foreign investors, it could attract significant inflows of $25-30 billion from JPMorgan’s inclusion, and if the other two index providers also add India inflows could go up to $50 billion,” noted Shantanu Bhargava of Waterfield Advisors.
Economic and Market Implications The influx of foreign capital is poised to have a profound impact on India’s bond market and broader economy. Increased demand for Indian government bonds is expected to drive down yields, thereby reducing the country’s borrowing costs. Concurrently, the Indian rupee is likely to appreciate due to the substantial dollar inflows.
“In the medium to long term, enhanced foreign participation could result in reduced yields on government bonds. Gradually, yields on corporate bonds may also reduce which in turn could lead to the reduction in cost of capital and cost of borrowing over the long-term,” Bhargava elaborated.
Broader Market Influence JPMorgan’s decision is anticipated to set a precedent, encouraging other global investors and institutions to augment their exposure to Indian bonds, further amplifying foreign investment. This could also prompt credit rating agencies to re-evaluate and potentially upgrade India’s sovereign rating.
“Hopefully rating agencies will respect investor viewpoints and give up on their moody and poor standards,” commented Nilesh Shah, Managing Director of Kotak Mahindra AMC, expressing optimism that this development could lead to an improved sovereign rating for India.
About The Author
