In a major development, JP Morgan Chase & Co has decided to include Indian government bonds in its global diversified index-emerging markets (GBI-EM GD) from June 2024 which will, likely, attract more foreign flows into the domestic debt market.
In a release, JP Morgan says, "India is expected to reach the maximum weight of 10% in the GBI-EM. Currently, 23 Indian government bonds (IGBs) with a combined notional value of US$330bn (billion) are index-eligible. Inclusion of the IGBs will be staggered over 10 months starting from 28 June 2024 through 31 March 2025, with inclusion of 1% of weight per month."
The GBI-EM GD accounts for US$213bn of the estimated US$236bn benchmarked to teh GBI-EM family of indeces.
India is also expected to enter other JP Morgan bond indexes - JADE Global Diversified index, JESG GBI-EM index and other aggregate suites of local currency indexes.
In a report, IDFC First Bank Ltd says the anticipation of Index inclusion has already driven 10-year government securities (G-Sec) yields to 7.14% levels on Thursday and in the remainder of FY23-24, it could see yields moving towards 7.0% due to the announcement impact. Moreover, the supply dynamics are better in the second half (H2) with lesser G-Sec supply, it added.
According to the report, after the inclusion into the JP Morgan EM Bond Index, India's chances of inclusion into the Bloomberg Global Aggregate Index (BGAI) also rise. "In case India is included in the Bloomberg Global Aggregate Index, it could result in inflows of US$15bn to US$20bn with India's weight ranging from 0.6% to 0.8%. Given the relatively small weight, India's inclusion could take place in one go, in case index inclusion takes place. Moreover, in BGAI, the country's weight will continue to rise as market capitalisation of fully accessible route (FAR) securities rises."
"The real impact on G-Sec yields will be felt in FY24-25, when foreign portfolio investment (FPI) inflows related to JPM GBI EM will start," IDFC First Bank says, adding, "Net G-sec supply in FY24-25 is likely to be Rs12tn (trillion), assuming Indian government fiscal deficit of 5.5% of gross domestic product (GDP). Long-only players – pensions, insurance and provident funds (PFs) have been prominent players in fixed income market as the share of formal sector rises in the economy."
"Banks which are the largest holder of G-secs (at 36.6% of outstanding G-secs as of March 2023), are another source of demand which will hold up in FY24-25. Two factors will support demand from banks – NDTL growth and rate cut expectations. In FY22-23, banks net bought Rs4.7tn of G-secs, which could rise to Rs4.8tn in FY24-25. JP Morgan index-related FPI inflows could take up Rs1.6tn in FY24-25. Total demand from these three segments alone - banks, investors and index-related flows, would account for more than 90% net supply in FY24-25. Hence, demand for G-sec could exceed supply by Rs900bn next year," the report says.