India To Witness Marginal Credit Gains In Near Term From Inclusion In JP Morgan's Bond Index: Fitch

Fitch Ratings believes that the inclusion of certain Indian sovereign bonds in key emerging-market bond indexes managed by JP Morgan will support the diversification of the investor base for Indian government securities. Overall, the rating agency sees the development as posiitve for India at the margin for financing flexibility.

Although the inclusion in JP's bond index is expected to lower funding costs slightly, and support further development of domestic capital markets Fitch believes that its "direct positive effects on India's credit profile will be marginal in the near term."

In its note on Wednesday, Fitch said, "India's high government debt and interest/revenue ratios are weaknesses in its credit profile, and developments that help to lower funding costs can have a significant influence on the sovereign's creditworthiness."

However, the rating agency added, "We expect the positive effect on the sovereign rating of India's inclusion in the JP Morgan Global Bond Index-Emerging Markets (GBI-EM) to be small, especially in the near term, as its impact on fiscal credit metrics is unlikely to be significant."

Last week, JPMorgan Chase & Co. announced the addition of Indian government securities (GSecs) to its emerging markets bond index with effect from June 2024. Indian GSecs will be added to the GBI-EM Global index suite, effective from June 28, 2024. It is expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD).

JP Morgan highlighted that currently, there are 23 Indian government bonds with a combined notional value of $330 billion which are eligible for the index. However, the inclusion of the GSecs will be staggered over 10 months through March 31, 2025 (i.e., the inclusion of 1 per cent weight per month).

Fitch explained briefly that JP Morgan GBI-EM indexes will limit their investments to local-currency government bonds issued under a fully accessible route (FAR), comprising 23 bonds with a total value of about USD330 billion. Inclusion in the indexes could facilitate about USD24 billion in passive inflows between June 2024 and March 2025. Flows could be greater if other indexes also move to include Indian government securities.

The resulting increase in foreign investor holdings of central government maturities is likely to be large - they accounted for only around 1.6% ($19 billion) of the market as of 2Q23, including about $12 billion of the bonds issued under the FAR. But Fitch also added, "We believe foreign investors will still represent a fairly small share of overall holdings, so their influence on debt pricing is likely to be limited."

Fitch believes that the increase in foreign investment in India's government securities markets is likely to have other positive effects, albeit small in scale. A more diverse investor base could reduce crowding-out risks: if the government becomes less reliant on financing from domestic financial institutions, it could give them greater leeway to provide credit to the private sector.

It could also stimulate further capital-market development.

Lastly, Fitch does not believe that inclusion in the JP Morgan GBI-EM indexes will significantly affect India's fiscal policy approach.