India inclusion in JP Morgan Bond index from today, $25-30 bn flow expected. What it means

India is set to officially join the J.P. Morgan GBI-EM Global Series of indices today, a move that could potentially lead to $25-30 billion inflows into the country. It will happen in phases over a 10-month period as the domestic bonds will hold 10% weightage and add 1% every month starting this month.

The country will become the 25th market to enter the index since its launch in June 2005.

The turnover in Indian local market instruments stood at over $350 billion in 2023, accounting for 9.2% of total EM trading volume.

India, which has been on index watch since October 21, upon its inclusion will have the single highest duration across the index at 7.03 years, with an above average yield-to-maturity at 7.09%, a JP Morgan note said.

Its inclusion will also increase EM Asia’s weight in the GBI-EM GD index and is forecasted to account for nearly half of the overall index weight. EM Asia’s weight in the GBI-EM GD is expected to go up from 40% now to 47.5% of the total index weight by 1Q25, the JP Morgan note added.

Vishal Goenka, co-founder of IndiaBonds.com, called it a "watershed moment" for the fixed-income markets in India which will compulsorily put the domestic bond markets on the radar of global bond investors. "Although initial investments are supposed to be to the tune of $25-30 billion, index inclusion paves the way for this number to keep growing in the next few years," he said.

Jalpan Shah, Head - Fixed Income at Trust Mutual Fund also heaped praise on IGB's inclusion. "The inclusion of Indian Government bonds in JP morgan emerging market bond index is a very positive development for the India Government bond market. The emergence of India as the fastest growing major economy, a stable government, low and stable inflation, low currency volatility and fiscal discipline makes a compelling argument for Foreign Institutional Investors (FII’s) to invest in Indian government bonds," Shah said.

"Since the announcement of this inclusion in September 2023, we have already witnessed FII buying of over USD10 bln in Indian Government bonds. FPI’s currently hold 2.4% of the outstanding Government Securities and this is likely to increase to around 5% over the next 12-18 months as Indian government bonds find inclusion in other global bond indices," he added.

In September 2023, JP Morgan said that India would be included in its GBI-EM global index suite starting June 28, 2024, with the country's bonds expected to reach a maximum weight of 10% in the GBI-EM Global Diversified Index. The inclusion of Indian government bonds will be staggered over a 10-month period from June 28 to March 31, 2025.

What India's inclusion in JP Morgan EM index means

It is important to grow the investor base for any market, and index inclusion helps in expanding the number of players, which further benefits everyone in the form of additional market liquidity, Goenka said.

The JP Morgan note sees ample scope of increase in non-resident participation in the local bond market given it currently sits at one of the lowest levels in EM. "We forecast non-resident holdings to nearly double over the next year, from the current 2.5% of outstanding to over 4.4%," the note said.

In an interview to The Economic Times, Vikas Jain, head of India trading, fixed-income, currencies and commodities at Bank of America, said that as foreign investment in Indian bonds heads toward the 10% weight on the JP Morgan bond index next year, the process of discretionary weighting changes would start to play out, creating a more complex trading environment.

"When investors decide to go overweight, they will go towards 12% of the index. When they go underweight, they will go to 8%. So, that 4% gap will regularly play out and that translates into an inflow or outflow of $10 billion-12 billion, which is a considerable number," Jain had said.

When asked about how local trading desks would deal with the radically new environment ahead, Jain said that the need of the hour was to onboard new FPIs (foreign portfolio investors).

"There is a vast investor base which has opened up. Each firm will need to maximise on it and try to onboard as many clients as possible. There's a very big opportunity for all of us. Investments in government securities are just the stepping stone," he said.

Nuvama's estimates suggest the inclusion of Indian Government Bonds (IGBs) could attract nearly $25-30 billion, a number also thrown-up by Goenka of IndiaBonds.com. The brokerage does not see a significant impact in the near term and going into the budget. It said that the positives are already priced-in and hence a range bound is expected for now.

Which bonds will qualify for inclusion?

1) Only bonds classified under the Fully Accessible Route (FAR) will be eligible for index inclusion. Within this subset of IGBs, there are currently 27 FAR-designated bonds which meet the index inclusion criteria.

2) India local debt stock is amongst the largest in EM, with the total outstanding of bonds included in the index standing over $400 billion -- only surpassed by China.

3) The bonds with the highest weightage in the index (over 0.5%) consists of 7.18 GS 2033, 7.30 GS 2053, and 7.18 GS 2037.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)


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