What JP Morgan’s bond index inclusion means for India and its economy

The move could attract more foreign investments into bonds, strengthen the rupee and improve the country’s credit rating, experts say

JP Morgan last week said that India's local bonds will be included in its Government Bond Index-Emerging Markets, from June 28 next year. Reuters

JP Morgan's move add India to its widely tracked emerging market debt index will have far-reaching economic benefits for the country, financial experts say.

The move is anticipated to bring down the cost of borrowing for the government, support the Indian rupee and bond markets, improve the country’s credit rating, and help boost economic growth in Asia's third-largest economy, as billions of dollars of foreign investment are projected to flow into the country, they say.

JP Morgan, the largest bank in the US, last week said that India's local bonds will be included in its Government Bond Index-Emerging Markets, from June 28. India's bond market is worth more than $2 trillion.

Indian government bonds and the rupee rallied on the news, which is expected to catalyse significant capital inflows into India’s debt market, adding to inflows on the equities front, Julius Baer analysts Magdalene Teo and Esther Yong said in a note.

The index inclusion is expected to attract capital inflows estimated at $22 billion to $30 billion into India’s debt market, even ahead of the official inclusion, which would broaden the investor base and improve market liquidity, they said.

"This could help to reduce borrowing costs and support higher debt issuances by the Indian government over the longer term, which is positive given India’s elevated fiscal deficit."

The move could also enhance the internationalisation of the rupee and pave the way for inclusion into other indices, they said.

“This inclusion is a major milestone in the country’s financial history,” says Amitabh Mohanty, managing director and chief executive at Mumbai’s JM Financial Mutual Fund.

“It will add a fairly reliable low-cost source of foreign capital to India, which is very significant for a capital deficient country of our size and growth prospects. This will not only lower the cost of borrowing for the government but will also ensure pulling down the cost of capital for all asset classes, leading to easier funding and better liability structures for the Indian government and, by extension, for Indian companies.”

India will eventually have a maximum weight of 10 per cent on the index, which will be phased in over a period of 10 months, JP Morgan said. There are 23 Indian government bonds with a total value of $330 billion that are eligible.

India's inclusion in JP Morgan's index “is poised to exert substantial influence on India's economic landscape”, says Kanika Bali, a partner at Optimyze Finance, an international professional services firm with offices in India and the UK.

It is “a favourable stride towards India's economic advancement as it beckons foreign investments, strengthens the Indian currency and paves the way for India's aspiration to attain a $5 trillion economy”.

The much-needed influx of foreign investment into Indian bonds can provide a substantial source of funding for the government and businesses, she says.

“This funding can be directed towards essential infrastructure projects such as building roads, bridges, schools and hospitals.”

India's currency also stands to benefit from the move.

When foreign investors buy Indian bonds included in the index, they exchange their foreign currency, such as dollars, for rupees, Ms Bali explains.

“This demand for the rupee increases its value, making it stronger against other currencies. A stronger currency is beneficial as it reduces the cost of imported goods and services for India,” she says.

The projected bond inflows over the inclusion could lower India's current account and fiscal deficits.

“India is a cash-starved nation,” says Niyati Mavinkurve, financial influencer and co-founder of YouTube channel Let's Make You Rich.

The country had already seen foreign investment flows taking place in anticipation of JP Morgan bringing India into its index, she says.

According to Bloomberg data, foreign investors have raised their holdings in index-eligible bonds to close to $12 billion, from $7.4 billion at the end of 2022.

The move signals the growing importance of India as a market for global investors, analysts say.

This is particularly significant at a time when investors are seeking alternatives to China and as some of India's emerging market peers have become less appealing because of disappointing returns.

“Given the positioning of India in the world with respect to its global position, growing economy and countries shying away from investing in China and Russia, JP Morgan understood that this is the time to bring Indian bonds into the global market,” says Himani Chaudhary, founder of Financial Vines.

Sandeep Bagla, chief executive of Trust Mutual Fund, says: “It is a significant development for Indian bond markets.”

“It will lead to higher allocation from foreign portfolio investors, 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.”

It also paves the way for potential inclusion in other bond indices, says Mr Bagla. This could include the Bloomberg Global Aggregate Index, he says.

Becoming a part of such indexes is something that India has been working on for years.

In 2019, the government began talks on having its debt included in global indexes. However, regulatory reforms were needed and India’s restrictions on foreign investments in its domestic debt market needed to be eased to qualify for inclusion.

The following year, the government introduced bonds that could be fully owned by foreign investors. The bonds were exempt from any foreign investment restrictions, which made them eligible for inclusion in global indexes.

India's addition to the JP Morgan index “was always a question of when and not if”, says Mr Mohanty.

“India’s bond markets are far more developed, liquid with significant depth and better regulated than a lot of the index constituents and hence non-inclusion of India in the index was an anomaly, which got rectified finally,” he says.

However, greater inflows could also bring inflationary risks, Mr Mohanty warns.

“If India is included in other emerging bond indices as well, it may lead to additional $10 to $15 billion,” he says.

“These are huge flows for India and will keep the Reserve Bank of India on its toes to manage the fallout of liquidity. I am sure the RBI, based on its estimate of inflation and growth, will aptly manage the flows and ensure that the level of liquidity in the system is at appropriate levels.”

The potential benefits to India’s bond markets that come with the country’s inclusion in the index, are immense, experts say.

“It would lead to increased foreign investment in the Indian bond market, which would push up bond prices and lower bond yields. This would make Indian bonds more attractive to investors, both domestic and foreign,” says Harsimran Sahni, executive vice president and head of treasury at Anand Rathi Global Finance.

“The inclusion of India in JP Morgan's bond index would lead to increased foreign investment in the Indian bond market. This would boost liquidity flows to the country and make it easier for Indian companies and the government to raise capital.”

India's bonds would become even more attractive if the country’s credit rating improves – and India's addition to the index does have the potential to impact this, according to financial experts.

“I’m hoping that rating agencies will acknowledge and respect the perspective of investors, potentially revising their ratings to reflect a more accurate assessment of India's creditworthiness,” says Shavir Bansal, founder of Bekifaayati, a financial services company.

S&P Global Ratings has assigned a BBB- credit rating to India, which is one notch above junk status.

“Inclusion in the index can enhance India's creditworthiness,” Ms Bali of Optimyze Finance says. “Credit rating agencies assess countries based on their ability to meet financial obligations.”

India's inclusion in the “prominent index” is a key milestone with “far-reaching consequences, both domestically and internationally”, she adds.