JP Morgan bond inclusion opens doors to $24 billion opportunity

According to financial metrics, India's bonds could represent up to 10 per cent of this index, representing a potential $24 billion investment in India's economy. Inclusion will be staggered over 10 months, starting in June 2024 till March 2025, at roughly 1 percent weight per month. The inclusion occurs when India confronts economic challenges, such as a high fiscal deficit and increased borrowing requirements.

When global financial institutions become interested in bonds, it is frequently simpler for governments to borrow at lower interest rates. The implications are noteworthy in the light of India's substantial borrowing, particularly since the COVID-19 pandemic. Lower financing costs would provide the Indian government with greater fiscal planning flexibility.

India has been discussing getting its government bonds included in big global lists since 2013. But this didn't happen because India had rules that limited how much foreign investors could put into its bonds. A note from Tata Mutual Fund pointed out that in April 2020, the Reserve Bank of India introduced a list of securities exempt from foreign investment restrictions under a "fully accessible route" (FAR), making them eligible for inclusion in global indexes.

Investors’ support

JP Morgan identified 23 Indian government bonds with a combined notional value of $ 330 billion eligible for inclusion. About 73 per cent of benchmarked investors voted in favour of India's inclusion.

The anticipated influx of capital could impact the Indian rupee. Converting foreign currency into rupees to purchase the bonds is likely to strengthen the local currency, which could reduce the cost of imports. In light of India's import volume, this may have economic repercussions. However, it is also important to note that a stronger currency could make exports more expensive, affecting India's global competitiveness.

Nilesh Shah, MD, Kotak Mahindra Asset Management Co Ltd, said India’s inclusion in the bond index was a step in the right direction. “With the exclusion of Russia and troubles in China, global debt investors' options have narrowed. Hopefully, rating agencies will respect investors' viewpoints and give up on their moody and poor standards. This inclusion will deepen the bond market in India.”

India’s financial sector landscape, which includes banks and non-banking financial companies (NBFCs), may also be affected. Generally, healthier banks result in improved lending rates, which has repercussions for numerous sectors of the economy.

Investment appeal

Inclusion in a significant global index, such as JP Morgan's, often indicates an economy's stability and investment appeal. This may create opportunities for investment in various sectors. But it also carries responsibilities and expectations for maintaining economic stability and meeting global financial standards.

Churchill Bhatt, Executive Vice President and debt Fund Manager at Kotak Mahindra Life Insurance Co Ltd, said this development will bring more money into India and make it easier for the Indian government to borrow money at lower interest rates. He said the interest rate for a commonly used 10-year government bond could drop below 7 per cent. Also, being on this list might get India added to similar lists, which means even more money coming in.

“This move could trigger inclusion from other similar indexes, such as the Bloomberg Global Aggregate index, which may bring further flows into the market. The announcement to include India’s bonds in the GBI-EM index will support India's bonds and local currency. We expect 10-year Government bond yields to settle comfortably below 7 per cent as we inch closer to the Index inclusion date,” Bhatt said.

Notably, the announcement by JP Morgan is part of a larger trend. The fact that FTSE Russell is contemplating including Indian bonds in its index demonstrates a growing international interest in India's financial market.

Long-term commitments

The case of Egypt, whose position in the same index is presently under review due to difficulties with currency repatriation, serves as a reminder. Maintaining specific economic conditions and meeting the expectations of the global financial community are prerequisites for such inclusion to be advantageous.

The benefits could extend to other financial instruments and markets beyond bonds. For example, stock markets may become more appealing to foreign institutional investors, and corporate bonds may also experience a spill-over effect. A financial market's maturity frequently has far-reaching effects, affecting institutional and retail investors.

While the short-term benefits of such an inclusion are relatively simple to identify, the long-term commitments and responsibilities are equally crucial. Inclusion in a global financial index necessitates transparent governance, economic stability and responsible financial practices. These are not one-time requirements but ongoing obligations requiring regular monitoring and adjustments.