India's Inclusion In JP Morgan's Bond Index: What It Means For Its Economy
The recent news of JP Morgan's inclusion of Indian government bonds in its one of the flagship indices brought cheers and optimism in the Indian economy amid negative sentiments. JP Morgan is a global financial services firm with assets of USD 2.6 trillion and operations worldwide.
What is JP Morgan EMBI?
JP Morgan indices cover a variety of asset classes which includes emerging markets, developed market bond indices and credit indices. The JP Morgan Emerging Market Bond Index (EMBI) was formed in the early 1990s following the issue of the first Brady bond and has since become the most extensively published and referenced index of its kind.
JP Morgan recently led investors towards higher yielding local rates by introducing the Government Bond Index-Emerging Markets (GBI-EM) series, which has become the new standard for local market and corporate EM benchmarks, respectively.
Indian G-Sec
Indian Government bonds are issued by the Reserve Bank of India (RBI). RBI mandates the Indian banks to keep a certain percentage of their deposit capital in the form of government bonds. It is essential for the liquidity management in the economy. It also enables the Government of India (GoI) to borrow money.
Currently, analysis of market activities point to asymmetric behaviour of one set of banks parking the surplus funds under SDF (Standing deposit facility) while a distinct set of banks borrows from the central bank under MSF(Marginal standing facility). The corridor should have been ‘yield agnostic’ for both sets ideally, and it’s difficult to decipher the behaviour of a bank parking funds in the SDF instead of actively exploring the means to deploy it through market channels, according to State Bank of India (SBI).
According to the data by (SBI) commercial banks hold 36.6 per cent of Indian bonds followed by RBI 13.68 per cent and Foreign Portfolio Investors 1.59 per cent. The Indian bonds inclusion in EMBI will increase the stake of foreign institutions.
“We believe yields could touch 7 per cent even before March of current fiscal and should affirmatively breach 7 per cent in FY25. Demand for G-sec could now outstrip Supply of G-sec. This could be a new turning point in the G-sec market in India where supply has traditionally outstripped demand for G-sec,” said SBI.
Experts reaction
G Pradeepkumar, CEO, Union Asset Management Company said, "The index inclusion could result in high inflows into FAR (fully accessible route) g-secs starting next year and completed by April / May 2025 via passive asset allocation. The inclusion of India in JP Morgan GBI-EM is expected to improve sentiment around India’s Bond markets and may lead to the 10-year G-sec yield easing in the near to medium term."
Pradeepkumar added that the inclusion is positive for the rupee in terms of the initial flows. However, it may increase the volatility in capital flows and in the rupee.
Srikanth Subramanian, CEO, Kotak Cherry stated, "India has received a total of USD 15bn in equities so far this year whereas the debt segment has received close to USD 3bn and we witnessed the rally from 17.5K to 20K in Nifty 50.
Subramanian also said that JP Morgan has now decided on India’s Gsec in its Emerging Market suite of indices which has roughly USD 240bn. The inclusion is due to happen in June 2024 with a small weight and is expected to go up to ten per cent in the subsequent 10 months.
"This is expected to add a flow of close to USD 24 billion almost 8x of what we have received this year. India’s current outstanding government debt is close to USD 11tn and is planning to issue another ~USD 200bn this year. Although the flow is small when you consider the total market size, this is going to open gates for India’s inclusion in other bond indices making the bond markets in India deeper, more liquid and potentially easy for retail investors to invest in. This goes on to add macroeconomic tailwinds for India as the cost of capital comes down with higher liquidity," Subramanian mentioned.
Positive and Negative Impact After Inclusion
Inclusion will begin in stages beginning from 28 June 2024. India will have a maximum weighting of 10 per cent in JPMorgan's flagship EMBI, which has a USD 213 billion baseline. Currently, 23 Indian Government Bonds (IGBs) with a total notional value of USD 330 billion are eligible for index.
“We believe choosing the JP Morgan EMBI could be a deliberate move on part of GoI/RBI to ensure future developments have a natural progression, evolving & maturing organically to mitigate possible points of friction.. Add to this the third index, the Bloomberg Barclays EM bond index and the funds flow numbers significantly go up,” said SBI.
Although, such inclusion can also pose a volatility threat since Indian bonds will come under foreign scrutiny. Constant outflows of foreign money from Indian bond can also devalue the Indian rupee.
“Large outflows from the system, even with a near predictable pattern (GST and advance tax every quarter, EPFO every month) affect the liquidity management adversely though the system recovers from such bouts of stress with the active support by the central bank,” said SBI.
Although the inclusion will start from next year, certain effects have already factored in the market. Indian bonds ratings, foreign inflow, volatility etc are few of the things which will be kept in focus.
