Here's What Experts Say On JPMorgan Adding India Bonds To Its Emerging-Markets Index

India's policymakers and markets have cheered the latest announcement that JPMorgan Chase & Co., a leading global financial services firm will be adding Indian government bonds to its benchmark emerging-market index. JP Morgan has said India's local bonds will be included in the Government Bond Index-Emerging Markets (GBI-EM) index from June 2024.

The development has come as a positive news for the South Asian country. Afterall the addition of IGBs to the index can likely drive billions of foreign inflows to India's debt market.

India's local bonds will be included in the Government Bond Index-Emerging Markets (GBI-EM) index and the index suite, benchmarked by about $236 billion in global funds according to JPMorgan.

The index provider is expected to add the securities starting June 28, 2024. India will have a maximum weight of 10% on the index, according to a statement.

Inclusion will start on June 28, 2024, and extend over 10 months with 1% increments on its index weighting, as India is anticipated to reach the maximum weighting of 10%, JPMorgan added.

Experts from Axis AMC believe that the suggested inclusion could drive US$25 - 30 billion (~Rs 2.5 lakh Cr) over the next 18 months.
The asset management company said that markets have been a buzz on possible inclusions, the confirmation saw markets react positively across the yield curve with long bonds seeing heightened trading activity. The 10 benchmark 10-year G-Sec stood at 7.10%1 at one point during the day.

"As per the index review, 23 bonds meet the Index eligibility criteria, with a combined notional value of approximately Rs 2.7 lakh Cr/ US$ 330 billion. 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. As per the inclusion policy, India will enter the indices in June 2024 and the weight will be assigned gradually over 10 months through March 2025," said Axis AMC.

"The fund inflow is likely to boost India's profile on the world stage and further strengthen local fundamentals. We believe the RBI could conduct sterilization operations during this inclusion period buffeting Forex reserves and the currency," it added.

Sandeep Bagla, CEO, Trust Mutual Fund said that sees the inclusion of Indian Government bonds to JP Morgan EM bond index from a small step for the index and a giant step for Indian bonds.

According to the Trust Mutual Fund CEO, the move is a significant development for Indian bond markets and it will lead to higher allocation from FPIs, stable capital inflows, stronger Rupee, and lower yields in general. More importantly, it marks a new era wherein India becomes a part of the global investment milieu and is a step towards India's financial globalisation.

He said, "It is going to be a staggered implementation starting June 28, 2024, adding 1% weight every month, implying a potential monthly inflow of about 2 billion dollars. It is significant, but not immediate. The impact is positive, mostly for bonds with maturity greater than 5 years, so should lead to further flattening of the curve. While there will be a 10-15 bp rally, we don't think it will extend beyond that immediately. The shorter end of the curve is anchored by RBI repo rates and tight liquidity conditions."

Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services, Waterfield Advisors said, "The change will take effect in June 2024, and India will have a maximum weight of 10% in the index. Maximum weight could be reached by March 2025. This has been a long-awaited measure and could be a significant boost for Indian Debt markets."

According to Shantanu Bhargava, the impact of the addition of Indian Government bonds to the J.P Morgan Index could be as follows:

- Could act as a catalyst for much-needed bond market deepening.
- In the medium to long term, enhanced foreign participation could result in reduced yields on government bonds.
- That, in turn, may gradually (medium/long term) reduce the yields on corporate bonds too.
- Which in turn, could lead to a reduction in the cost of capital & cost of borrowing over the long term.
- Could have a positive impact on our currency in the medium to long run.

Speaking on JPMorgan adding India to its emerging markets bond index, Sandip Raichura - CEO & Director (Broking and Distribution), Prabhudas Lilladher Pvt Ltd said, "JPMorgan Chase & Co.'s decision to add Indian government bonds to its benchmark emerging-market index is a highly anticipated event that carries significant implications for the nation's debt market. With India receiving a 10% allocation in the $240 billion index, this move has the potential to attract billions of foreign inflows."

Sandip Raichura said that India could expect to receive close to $24 billion in foreign inflows over a 10-month period starting from June 24. In fact, foreign portfolio investors (FPIs) are already entering the Indian fixed-income market in anticipation of this inclusion.
"This inclusion is considered a major positive, as it will absorb more than 15% of the net supply of Government Securities (GSEC) for FY 25. Furthermore, it is expected to reset historical spreads by 20-25 basis points downwards, resulting in a lower capital cost of borrowing for India. Additionally, the increase in forex reserves will contribute to an improved external fundamental situation for the country," he added.

Speaking on this development, BofA Securities said, "India's inclusion will likely reduce weights of other markets, and index profile may become similar to Dec'21, prior to Russia inclusion. Russia had 7.2% weight in the index then."

According to the financial services company China and Indonesia can likely stay at 10% while Malaysia and Thailand look susceptible to a reduction in weight by around 1%, which would be equivalent to USD 2-3 Bn outflows from each of these markets. It said: "We note that investors have already been underweight in Thailand and Malaysia on a notional basis, which would reduce the actual outflows."

"However, current IGB yields and flat curve seem to indicate some positioning on the domestic front as IGBs have reacted positively to recent news around potential inclusion. IGB yields have held up well this year even as domestic inflation went sharply higher, markets priced rate hikes, liquidity tightened and bond issuance stayed elevated.

Spread of IGB yields over IndoGBs has also tightened further by 40bps to only 35bps on an absolute basis and negative on tax-adjusted basis, despite a policy rate difference of 75bps and much better fiscal dynamics in Indonesia. Despite the better demand-supply for IGBs in FY25, the near-term impact may be limited and IGB 10y may find it difficult to sustain the rally, in our view," it added.