Indian govt bonds set to join JP Morgan index from June 28; $25-30 bn of inflow expected

Indian government bonds are scheduled to be included in JPMorgan Chase’s benchmark emerging-market index from June 28, 2024, a move that is likely to boost foreign fund inflows in the country’s debt market. The inclusion process, which will be phased over 10 months until March 31, 2025, is likely to lead to fund inflows of around $25-30 billion into the country, according to industry experts.

“JPMorgan Index inclusion of Indian government bonds is a watershed moment for the fixed-income markets in India and very welcome. 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,” says Vishal Goenka, co-Founder of IndiaBonds.com.

Echoing the same, HSBC Global Research in a report estimated “indexation-related inflows of $20-22 billion” into Indian government bonds (IGBs).

In September 2023, JP Morgan announced that India's local bonds would be included in the Government Bond Index-Emerging Markets (GBI-EM) index and the index suite from June 28, 2024.

As per the HSBC report, Indian government bonds have already seen inflows of $10.4 billion since the inclusion announcement on September 21, 2023. However, a large part of inflows has yet to materialise and this is likely to be led by benchmark issues, the report notes.

“This poses a question whether a large part of indexation-related inflows have materialised. We note that index eligible bonds have recorded inflows of only $8.3 billion and four off-the-run issues alone have received 66% of the foreign investments,” the report highlights.  

Goenka of IndiaBonds.com also believes that index inclusion will help in expanding the investor base, which would further benefit in the form of additional market liquidity. “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,” he says.

“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 adds.

India currently has a local currency debt rating of BBB- / BBB- / Baa3 (Fitch / S&P / Moody’s), making the market eligible for the IG-only variant of the GBI-EM GD, i.e., GBI-EM Global Diversified IG 15% Cap index. India is expected to have a weight of 14.59% in the index, which will be phased in over the 10-month period.

How many IGBs are eligible for inclusion?

Initially, 23 IGBs with a combined notional value of $330 billion (₹27 lakh crore) will be eligible for inclusion in the GBI EM index. As per the ‘10/10 rule’ for country inclusion in J.P. Morgan EM indices, inclusion of the Fully Accessible Route (FAR)- designated IGBs will be staggered into the GBI-EM Global Diversified over 10 months (starting June 28, 2024, through March 31, 2025), with 1% weight being included each month. India is expected to reach the maximum weight of 10% in the GBI EM Global Diversified Index (GBI-EM GD) by March 31, 2025.

As per HSBC report, to accommodate India's 10% weight in the index, a reweighting will occur for other EM peers in the index, which will see a reduction in their weights. “In our view, the reweighting impact will not be significant, given that India's inclusion will be phased over a 10-month period. We also find that reweighting is likely to be less meaningful for EM high yielders, given their market size, while the largest reduction in weights at the end of the 10-month period is likely to occur for Thailand, Poland and Czech.”

Launched in June 2005, GBI-EM indices are comprehensive global emerging markets index that track local currency bonds issued by emerging market governments. GBI-EM GD accounts for $213 billion of the estimated $236 billion benchmarked to the GBI-EM family of indices.

India had been on ‘Index Watch Positive’ since 2021 for inclusion into the GBI-EM, following the Indian government’s introduction of the FAR program in 2020 and substantive market reforms for aiding foreign portfolio investments.

As per the index inclusion criteria, eligible instruments are required to have notional outstanding above $1 billion (equivalent) and at least 2.5 years remaining maturity. At the start of the inclusion on June 28, 2024, only FAR-designated IGBs with a maturity date after December 31, 2026, will be assessed for eligibility. Any new index-eligible FAR-designated IGBs issued during the phase-in period will also be included.

There are 38 FAR IGBs, but only 28 bonds (outstanding amount of $413 billion) are eligible for inclusion, as per HSBC report. “We believe that 5-year, 7-year, 10-year and 30-year benchmarks alone could closely track the return performance of these 28 bonds. Moreover, a low foreign positioning in benchmark bonds and a relative increase in their index weight versus other bonds (which are not active in the auction cycle) means that these bonds are likely to be the key target of foreign flows,” the report notes.