India is set to see billions of dollars of inflows after JP Morgan Chase & Co became the first global index provider to include Indian bonds on its emerging market index last week. Currently, foreign investors own two per cent of Indian debt, a number which could more than double after the next inclusion.
Indian bonds are expected to account for ten per cent of the index once included.
The inclusion would result in index tracking managers allocating money to India, which is expected to be in tens of billions of dollars.
What is the inclusion?
Launched in June 2005 as the first comprehensive global local emerging markets index, GBI-EM tracks local currency bonds issued by emerging market governments. It has $213 billion worth of assets under management (AUM).
JP Morgan said India had been on Index Watch Positive since 2021 for inclusion in the GBI-EM, following the government’s introduction of the fully accessible route (FAR) programme in 2020 and substantive market reforms for aiding foreign portfolio investment.
India’s inclusion would result in more foreign inflows into India
India’s fixed-income markets could see inflows upwards of $40 billion over the next one and a half years (where the phase-in period will be completed by March 2025), as per a Goldman Sachs analysis. Given that several emerging market-dedicated funds are already set up in India, Goldman believes the flows will be front-loaded, beginning immediately, as investors pre-position for inclusion next year.
As many as 23 G-Secs (government securities) with a combined value of $ 330 billion are eligible for inclusion in the global index.
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Nomura note said Thailand could bear the brunt of the relocation of resources to India with outflows amounting to $3.6 billion.
Move supports the rupee
Larger debt inflows from next financial year will make it easier for India to finance its current account deficit and reduce the pressure on the rupee.
India’s bond market is worth more than $2 trillion. When foreign investors buy Indian bonds included in the index, they exchange their foreign currency, such as dollars, for rupees. The demand for the rupee then increases its value, making it stronger against other currencies.
“Beyond the near-term euphoria, this should structurally augur well for rates and FX markets, leading to lower cost of borrowings for the economy at large and more accountable fiscal policy-making,” said Madhavi Arora, lead economist at Emkay Global Financial Services.
Indian bonds may also enter other global indexes
The development could mean Indian bonds’ entry into another widely tracked index, the Bloomberg Global Aggregate Index, which could result in inflows of another $15 billion. Typically the review for this index inclusion happens in November, with results being announced in January.
According to Barclays research, India’s prospects for getting into other major bond indices, such as the Bloomberg Global Aggregate Index and the FTSE Russell World Government Bond Index, however, remain low as they need Euroclearability for ease of settlement and a higher sovereign credit rating, which India does not appear close to.
India’s fiscal deficit remains high at a targeted 5.9% of GDP for the year ending March 31, 2024, which will result in the government borrowing a record 15 trillion rupees (about $181 billion). So far, banks, insurance companies and mutual funds have been the largest buyers of government debt. An additional source of funds will help cap bond yields and the government’s borrowing costs.
Traders estimate the benchmark bond yield will fall 10-15 basis points to 7% over the next few months. Corporate borrowers will also benefit as their borrowing costs are benchmarked to government bonds. India’s fiscal deficit remains high at a targeted 5.9% of GDP for the year ending March 31, 2024, which will result in the government borrowing a record 15 trillion rupees (about $181 billion).
Yield on the benchmark 10-year G-Sec, was trading in a narrow range at around 7.15%. Post the global bond index inclusion news flow, yield fell below 7.10%.
“Accrual remains the theme for 2023 on a risk-reward basis. The yield curve in the 2 –5 years segment is offering attractive nominal yields; given that we have seen some correction in longer end bonds one can look to play duration in this segment on a tactical basis,” said Sachin Jain, analyst at ICICI Securities.
Index inclusion opens up India’s fiscal situation to greater scrutiny
At 8.9% of gross domestic product, India’s combined government fiscal deficit is the highest among the 20 countries tracked under the JPMorgan Government Bond Index-Emerging Markets.
Global investors will pay attention to efforts by Prime Minister Narendra Modi’s government to reduce its deficit and debt, said Kotak Securities economists led by Suvodeep Rakshit.
“The index inclusion opens up India’s fiscal situation to greater scrutiny, with spending quality, efficiency of tax and other receipts collection, and adherence to fiscal consolidation path being closely monitored,” they said.