JP Morgan To Include Indian Bonds In Its Emerging Bond Index From June Next Year; How It Will Impact Rupee

JP Morgan & Chase has announced that it will include Indian government bonds to its emerging markets bond index by June 2024, which will attract more foreign flows into the domestic debt market. India will be included in the GBI-EM Global index suite starting June 28, 2024. 

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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, JP Morgan was quoted as saying by reports.

The bank was further quoted as saying that India is expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD).

Currently, 23 Indian Government Bonds have a combined notional value of $330 billion which are index eligible. All fall under the category of "fully accessible" for non-residents.

The decision to incorporate Indian bonds into the GBI-EM index has been applauded by experts, who believe it will expand the investment choices for bond investors. This move is expected to facilitate the growth of the Indian bond market. Additionally, it carries favorable implications for the domestic currency, as it will reduce India's funding costs and support the financing of its fiscal and current account deficits.

“It is a significant development for Indian bond markets. 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,” said Sandeep Bagla, CEO Trust Mutual Fund.

Bagla further added, “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. Shorter end of the curve is anchored by RBI repo rates and tight liquidity conditions.”

Madhavi Arora, lead economist at Emkay Global Financial Services, quoted as saying by Livemint, believes that this measure will reduce India's risk premium and funding costs, bolster the liquidity and ownership of government securities (G-Secs), and facilitate India in financing both its fiscal deficit and current account deficit (CAD).

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"In the near term, we expect bond yields and the Indian rupee to reverse gains after the initial euphoria, tracking global markets. However, the trend will again reverse in favour of bonds by March 2024, with the 10-year yield coming off well below 7%. For the second half of the current financial year (H2FY24), we see the USD-INR range at 82.25-84.25, with tactical RBI intervention keeping it in the middle of the EM (emerging market) Asia pack," said Arora.