Inclusion of Indian Government Bonds (IGBs) in JP Morgan’s Emerging Markets Bond Indices

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Context

• Starting from June 28, 2024, Indian Government Bonds (IGBs) will be included in JP Morgan’s emerging markets bond indices.
• This inclusion will be phased over ten months, concluding on March 31, 2025, and is expected to bring substantial capital inflows to India, estimated between $20-25 billion.

JP Morgan JP Morgan is a global leader in financial services, offering comprehensive solutions in investment banking, commercial banking, financial transaction processing, and asset management. Serving millions of customers primarily in the U.S., and numerous prominent corporate, institutional, and government clients worldwide, the firm is committed to fostering growth and stability through continuous investments in technology, innovation, and talent. Additionally, JP Morgan emphasizes philanthropic initiatives, community development, and employee advancement, aiming to create opportunities for economic and social progress, thus playing a pivotal role in the global financial ecosystem.

Details of Inclusion

• Indices Affected: IGBs will be included in the GBI-EM Global index suite and all relevant derivative benchmarks, including custom indices.
• Timeline: The inclusion will be staggered over ten months from June 28, 2024, to March 31, 2025.

India's Weight in the Index

• Maximum Weight: India is expected to reach a maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD).
• Investment Flows: A higher weightage will prompt global investors to allocate more funds to Indian debt, resulting in an estimated $2-3 billion in monthly inflows.

Eligible Indian Government Bonds

Eligibility Criteria

• Number of Bonds: 23 IGBs meet the index eligibility criteria with a combined notional value of approximately Rs 27 lakh crore ($330 billion).
• Criteria for Inclusion: Only IGBs designated under the Fully Accessible Route (FAR) are eligible. These must have a notional outstanding above $1 billion and at least 2.5 years of remaining maturity.
• Maturity Requirements: At the start of inclusion, only FAR-designated IGBs with a maturity date after December 31, 2026, will be assessed for eligibility.
• New Issues: Any new index-eligible FAR-designated IGBs issued during the phase-in period will also be included.

Expected Capital Inflows

• Monthly Inflows: India is anticipated to receive $2-2.5 billion monthly during the inclusion period.
• Total Inflows: The total inflows over the ten-month period are expected to be between $20-25 billion.
• Pre-Inclusion Inflows: Since the announcement in September 2023, IGBs have already seen inflows of $10.4 billion.
• Year-to-Date Inflows: In 2024, foreign portfolio investors have purchased $8.06 billion of Indian debt.

Impact of Bond Inclusion

Economic Benefits

1. Debt Market: The inclusion will lead to fresh active flows into the debt market, enhancing liquidity and ownership of government securities (G-secs).
2. Fiscal and CAD Financing: It will aid in financing the fiscal deficit and current account deficit (CAD).
3. Investment Diversification: The investor base for Indian government securities will diversify, potentially lowering funding costs and supporting domestic capital market development.

External Finances

• Current Account Balance: India recorded a surplus of $5.7 billion (0.6% of GDP) in Q1 2024, compared to a deficit of $1.3 billion (0.2% of GDP) in Q1 2023.
• Rating Agency Perspective: Fitch Ratings noted that inclusion in the bond indices will support diversification of the investor base and may slightly lower funding costs.

Concerns for the Reserve Bank of India (RBI)

Inflationary Pressures

• Currency Impact: Higher inflows will boost the rupee.
• Inflation Control: When RBI absorbs the incoming dollars, it releases an equivalent amount in rupees, which could lead to inflationary pressures.
• RBI’s Response: Governor Shaktikanta Das stated that the RBI has several instruments to manage these inflows and inflationary pressures effectively. He reassured that the RBI has managed similar situations in the past and will do so again.

Future Inclusions

Bloomberg's Announcement

• Upcoming Inclusion: Bloomberg announced in March 2024 that Indian government bonds will be included in the Bloomberg Emerging Market (EM) Local Currency Government Index starting January 31, 2025.
• Indices Included: The indices in the scope for inclusion include the Bloomberg EM Local Currency Government Index, the Bloomberg EM Local Currency Government Index 10% Country Capped Index, and all related sub-indices.
• Initial Weight: Indian FAR bonds will have an initial weight of 10% of their full market value.

Conclusion

• The inclusion of IGBs in JP Morgan’s emerging markets bond indices marks a significant milestone for India, attracting substantial foreign investment, supporting external finances, and potentially lowering funding costs.
• However, the RBI will need to manage the resultant inflationary pressures effectively to ensure economic stability.

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PRACTICE QUESTION Q.  Discuss the mechanisms through which India can attract substantial foreign investment, support its external finances, and potentially lower funding costs. Highlight the role of recent policy measures and financial market developments in achieving these objectives.

SOURCE: INDIAN EXPRESS