Indian Government Bonds on JP Morgan’s indices from June 28 likely to bring $20-25 billion to country

This process will be spread over 10 months, concluding by March 31, 2025, and is expected to bring in approximately $20-25 billion into the country, according to various estimates.

These increased inflows will assist India in managing its external finances, bolstering foreign exchange reserves, and strengthening the rupee. However, the Reserve Bank of India (RBI) will need to deploy its tools to mitigate the potential inflationary pressures resulting from these inflows.

JP Morgan had announced in September last year that IGBs would be included in its emerging markets bond index starting June 2024. This decision followed the 2023 index governance review.

“India will be included in the GBI-EM Global index suite and all relevant derivative benchmarks (including custom indices), starting June 28, 2024,” JP Morgan said. The inclusion of Indian bonds will be staggered into the GBI-EM Global Diversified Index (GBI-EM GD) over 10 months from June 28, 2024, through March 31, 2025, it said.

India is poised to achieve a maximum weight of 10 percent in the GBI-EM Global Diversified Index (GBI-EM GD). This higher weightage is anticipated to attract increased funds from global investors into Indian debt, with analysts predicting monthly flows of $2-3 billion.

According to JP Morgan's index inclusion criteria, eligible instruments must have a notional outstanding amount exceeding $1 billion (equivalent) and a remaining maturity of at least 2.5 years. "Starting June 28, 2024, only FAR-designated IGBs with maturity dates beyond December 31, 2026, will initially be considered for eligibility," JP Morgan stated.

Any new index-eligible FAR-designated IGBs issued during the phase-in period will also be included.

Economists estimate that India could receive between $2 billion to $2.5 billion each month over the 10-month inclusion period beginning June 28. Overall, it is expected that India will attract $20 billion to $25 billion in inflows due to this index inclusion.

"JP Morgan 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," stated Vishal Goenka, Co-Founder of IndiaBonds.com.

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.

"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.