JPMorgan to add India to its emerging markets bond index from June 2024
Indian government bonds will be added to JPMorgan Chase’s benchmark emerging-market index, a move which is likely to boost foreign fund inflows in the country’s debt market. India's local bonds will be included in the Government Bond Index-Emerging Markets (GBI-EM) index and the index suite from June 28, 2024, the American multinational and universal bank and financial services firm says in a release on September 21.
JPMorgan says that 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are eligible. India is expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD), as per the release.
“Inclusion of the IGBs will be staggered over a 10-month period starting June 28, 2024, through March 31, 2025 (i.e., inclusion of 1% weight per month),” it says.
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.
According to a market analyst, this was long-awaited by India’s debt market, which may reset the base rate and the yield would come down sharply. “This will reset the base rate for India and the yield should come down sharply. India's cost of borrowing will come down. Since Covid, the fiscal deficit in India has remained elevated due to higher borrowing. This event will ease borrowing pressure as a large part of the borrowing will be observed by this route. Banks Treasury will be flushed with mark-to-market gains,” says Mukesh Kochar, National Head - Wealth, AUM Capital.
“At the same time, it is a big positive for our currency as a big dollar flow will be there due to the buying of government securities. As far as the equity market is concerned it is positive for Banks, NBFC, leveraged companies etc . By and large it is a big macro positive for India,” he says.
India has been on ‘Index Watch Positive’ since 2021 for inclusion into the GBI-EM, following the Indian government’s introduction of the Fully Accessible Route (FAR) program in 2020 and substantive market reforms for aiding foreign portfolio investments.
“Notably, only IGBs designated under the Fully Accessible Route (FAR) are index eligible. As a result, India’s weight is expected to reach the maximum weight threshold of 10% in the GBI-EM GD, and approximately 8.7% in the GBI-EM Global index,” the release notes.
As per the ‘10/10 rule’ for country inclusion in J.P. Morgan EM indices, inclusion of the 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.
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.
IGBs remain ineligible for the GBI-EM Narrow/Diversified series, due to taxes levied on foreign investors, it adds.
Inclusion of FAR-designated IGBs into the GBI-EM Global/Diversified indices is estimated to increase index yields by 33 basis points (bps) and 8bps, respectively, upon completion of the staggering process. The duration for GBI-EM Global and GBI-EM GD is expected to extend by +0.19 years (to 5.34) and +0.24 years (to 5.22), respectively.
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.
The release further says that India is expected to enter the Asia (ex-Japan) local currency bond index (JADE Global Diversified), and it is expected to have a weight of 18.48%. Meanwhile, for the JADE Broad Diversified index, India’s weight will increase from 10% to 20% in the JADE Broad Diversified index over the 10-month phasing period.
India currently falls in Band 4, according to the JESG Methodology, and is expected to join the JESG GBI-EM index with an estimated weight of 6.73%.
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