Indian Government Bonds Join JP Morgan’s Bond Index-Emerging Markets (GBI-EM)

Ira Singh
Khabar Khabaron Ki,29 June’24

Indian government bonds formally became a part of JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) on Friday,28 June. This inclusion marks a significant milestone, recognizing India’s (world’s fastest growing major economy) economic reforms and enhancing its position in global financial markets. This long awaited development in the Indian financial market is likely to bring about substantial changes, drawing increased foreign investment and elevating India’s stature in the global bond market.

For India, joining JPMorgan Chase & Co’s emerging-market bond index, hallowed territory for a certain Wall Street set, is a significant milestone- one that’s projected to attract billions in investment. Inclusion in the index comes at a moment that China looks tired, Russia is no longer investible and other emerging markets face instability — all of which makes India that much more attractive.

This inclusion is expected to pave the way for substantial foreign investments into the country , potentially amounting to $25-30 billion. The process will unfold gradually over a 10-month period, with Indian domestic bonds initially holding a 1% weightage in the index, increasing by 1% each month until it reaches a maximum of 10% by March 2025.

According to estimates, a 10% weight for IGB (Indian Government Bonds) in the JP Morgan EM Bond Index could lead to inflows worth $21 billion (Rs 1.7 trillion) worth of investments by 31st March 2025. 1% weight will be added each month from June-24 till Mar-25. Recently in a report published by a leading Global investment banking and securities firm, Goldman Sachs Group Inc,related to India’s inclusion in the Government Bond Index-Emerging Market , this inclusion means foreign investors will finally gain access to India’s tightly- regulated $1.3 trillion government bond market. Besides, Goldman Sachs has pegged the estimated funds inflow figure at $40 billion. India’s index-eligible bonds have already attracted around $10 billion since the announcement of inclusion,in September 2023 was made, stated report.

There is a condition in inclusion that only g-secs (Government securities) issued under the Reserve Bank of India’s ‘Fully Accessible Route’ (FAR) are eligible for inclusion in the indices. These bonds must have a minimum outstanding amount above $1 billion and at least 2.5 years of residual maturity.

Meanwhile , India is the 25th market to join the JP Morgan Emerging Market Bond Index since since its inception in June 2005. Acccording to information, the turnover in Indian local market instruments exceeded $350 billion in 2023, comprising 9.2% of the total trading volume in Emerging Markets (EM).

According to JP Morgan, Indian government bonds included in the index will boast the highest duration at 7.03 years and a yield-to-maturity above the average at 7.09%. This move is anticipated to elevate EM Asia’s weight in the GBI-EM GD index significantly, potentially accounting for nearly half of the total index weight by the first quarter of 2025.

Expert Opinions
Financial experts have welcomed the inclusion, highlighting its potential to transform India’s bond market.This is a game-changer for India’s financial markets. It opens up new avenues for foreign investment and will likely lead to enhanced liquidity and lower borrowing costs,believe experts.

The benchmark 10-year G-sec (Government Securities)yield itself is expected to moderate to 6.85 percent with higher global demand and well managed fiscal deficit. Also, this sets the stage for the inclusion of Indian corporate bonds in the near future,” said Debopam Chaudhuri, Chief Economist at Piramal Group.

This move reflects a certain confidence in India’s economic trajectory and is expected to have far-reaching implications for India’s economy, capital markets, and global investor sentiment.