India's Inclusion in JP Morgan's Bond Index: Why Does It Matter?

Experts said India's inclusion in JP Morgan Bond Index will reduce borrowing cost for the government, apart from putting the Indian bond market on the radar of global bond investors.

Indian government bonds or government securities (G-secs) have been included in the JP Morgan-Emerging Market Bond Index. The inclusion, effective June 28, will be staggered over a 10-month period from June 28, 2024, to March 31, 2025, indicating one per cent increment on its index weight. Experts said the development will reduce borrowing cost for the government, apart from putting the Indian bond market on the radar of global bond investors.

Currently, India carries a 1 per cent weight in the JP Morgan-Emerging Market Bond Index.

India’s weight is expected to reach the maximum threshold of 10 per cent in the GBI-EM Global Diversified, and approximately 8.7 per cent in the GBI-EM Global Index.

JP Morgan has included 29 Indian government securities under the Fully Accessible Route (FAR) in its emerging market index.

India’s Inclusion In JP Morgan Bond Index: Why Does It Matter?

Bond market experts said the inclusion of Indian bond market in the JP Morgan-EMB Index will help attract higher foreign flows, as it puts Indian bond markets on the radar of global bond investors.

It will also help bring in large passive investments from overseas, as a result of which more domestic capital would be available for industry, as crowding out would be reduced.

Vishal Goenka, co-founder of IndiaBonds.com, said, “JP Morgan Index inclusion of Indian government bonds is a watershed moment for the fixed-income markets in India. This compulsorily puts Indian bond markets on the radar of global bond investors and although initial investments are supposed to be to the tune of $25-30 billion, index inclusion paves the way for this number to keep growing in the next few years.”

It is important to grow the investor base for any market, and index inclusion helps in expanding the number of players, which further benefits everyone in the form of additional market liquidity, he added.

Goenka also said global investors have been looking to allocate capital to emerging markets given their reluctance to invest in other large countries like Russia or China in the past couple of years. Hence, the timing of this index inclusion is also almost perfect.

“I reckon investments will start via government bonds initially, but filter into AAA to lower credit ratings as well in the years to come,” he added.

In her Budget speech for 2020-21, Finance Minister Nirmala Sitharaman had said, “Certain specified categories of government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well.”

The specified securities, which will be listed on the indices, will not have a lock-in requirement.

India’s Govt Bond Market After India’s Inclusion In JP Morgan Index

According to the latest data from the Clearing Corporation of India Ltd (CCIL), the FAR holdings of foreign portfolio investors (FPIs) increased to Rs 1,86,415.919 crore on July 1, compared with Rs 1,84,761.90 crore on June 27.

FPI ownership in the 7.18% 2033 bonds stood at 12.43 per cent on July 1, higher as against 12.17 per cent on June 27.

Indian bond yields held steady on July 1. The yield on the 10-year benchmark bond 7.10% 2034 opened at 7.0205%, marginally up from the previous day’s close of 7.0095%. Similarly, the yield on the old 10-year bond started the day at 7.0653%, compared to 7.0533% on June 28.