$30 billion inflows! What India’s inclusion in JP Morgan Bond index means

India is poised to formally enter the J.P. Morgan GBI-EM Global Series of indices today. This inclusion, phased over a 10-month period starting this month, will see Indian government bonds (IGBs) holding a 10% weightage, increasing by 1% each month. This move could generate potential inflows of $25-30 billion into the country, making India the 25th market to join the index since its launch in June 2005.
In September 2023, J.P.Morgan announced that India would be included in its GBI-EM global index suite starting June 28, 2024. The country’s bonds are expected to reach a maximum weight of 10% in the GBI-EM Global Diversified Index, with the inclusion to be staggered over a 10-month period from June 28, 2024, to March 31, 2025.
For a bond to be included in the index, it must be classified under the Fully Accessible Route (FAR). Currently, there are 27 FAR-designated bonds that meet the index inclusion criteria. India's local debt stock is amongst the largest in EM, with the total outstanding of bonds included in the index standing at over $400 billion, only surpassed by China. The bonds with the highest weightage in the index include 7.18 GS 2033, 7.30 GS 2053, and 7.18 GS 2037.
In 2023, the turnover in Indian local market instruments stood at over $350 billion, accounting for 9.2% of total emerging market (EM) trading volume. With India's inclusion, the country will have the single highest duration across the index at 7.03 years and an above-average yield-to-maturity at 7.09%, according to a J.P. Morgan note. This will also increase EM Asia’s weight in the GBI-EM GD index to nearly half of the total. The weight is forecasted to rise from 40% to 47.5% by the first quarter of 2025.
According to an ET report, Vishal Goenka, co-founder of IndiaBonds.com, has described this as a watershed moment for India's fixed-income markets. "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," he said.
Jalpan Shah, Head of Fixed Income at Trust Mutual Fund, has also praised the inclusion, calling it a very positive development for the Indian government bond market. "The emergence of India as the fastest-growing major economy, a stable government, low and stable inflation, low currency volatility, and fiscal discipline makes a compelling argument for Foreign Institutional Investors (FIIs) to invest in Indian government bonds," Shah said.
"Since the announcement of this inclusion in September 2023, we have already witnessed FII buying of over USD10 billion in Indian Government bonds. FPIs currently hold 2.4% of the outstanding Government Securities and this is likely to increase to around 5% over the next 12-18 months as Indian government bonds find inclusion in other global bond indices," Shah added.
The inclusion of Indian bonds in the J.P. Morgan EM index aims to expand the investor base, leading to increased market liquidity. According to Goenka, this will drive more players into the market, benefiting everyone involved.
The J.P. Morgan note also sees ample scope for increased non-resident participation in the local bond market. Currently, non-resident holdings are at one of the lowest levels in EM but are forecasted to nearly double over the next year, from the current 2.5% of outstanding to over 4.4%.
In an interview with ET, Vikas Jain, head of India trading for fixed-income, currencies, and commodities at Bank of America, spoke about the potential inflows and outflows to the Indian bond market. "When investors decide to go overweight, they will go towards 12% of the index. When they go underweight, they will go to 8%. So, that 4% gap will regularly play out and that translates into an inflow or outflow of $10 billion-12 billion, which is a considerable number," Jain said.
Estimates from Nuvama suggest the inclusion of Indian Government Bonds (IGBs) could attract nearly $25-30 billion. The brokerage does not expect a significant impact in the near term and heading into the budget, noting that the positives are already priced in, hence expecting range-bound movements for now.