India enters JP Morgan Bond Index: What is its significant
What's the story
India has officially become a part of the J.P. Morgan GBI-EM Global Series of indices, a move that could potentially lead to an inflow of $25-30 billion into the country.
The inclusion process will take place over 10 months, with domestic bonds initially holding a 10% weightage and increasing by 1% each month.
This makes India the 25th market to join the index since its inception in June 2005.
Market influence
Indian market's impact on JP Morgan Bond Index
The turnover in the Indian local market instruments exceeded $350 billion in 2023, accounting for 9.2% of total EM trading volume.
Upon its inclusion, India will have the highest duration across the index at 7.03 years and an above-average yield-to-maturity at 7.09%, as per a JP Morgan note.
This inclusion is also set to increase EM Asia's weight in the GBI-EM GD index, expected to rise from 40% to 47.5% by Q1 2025.
Expert opinions
Experts hail India's inclusion in JP Morgan Bond Index
Vishal Goenka, co-founder of IndiaBonds.com, described the inclusion as a "watershed moment" for India's fixed-income markets.
He suggested that initial investments could reach $25-30 billion and continue to grow in the coming years.
Jalpan Shah, Head - Fixed Income at Trust Mutual Fund, also praised the move, citing India's economic growth and fiscal discipline as compelling reasons for Foreign Institutional Investors (FII's) to invest in Indian government bonds.
Market forecast
Increase in non-resident participation expected
Since the announcement of India's inclusion in the bond index in September 2023, FIIs have purchased over $10 billion in government securities.
JP Morgan predicts a significant increase in non-resident participation, forecasting holdings to nearly double over the next year from the current 2.5% to over 4.4%.
Vikas Jain, head of India trading at BoA, anticipates a more complex trading environment as foreign investment in Indian bonds approaches the 10% weight on the JP Morgan bond index next year.
Index impact
Eligibility and impact of India's inclusion on global indices
Only bonds classified under the Fully Accessible Route (FAR) will be applicable for index inclusion.
Currently, 27 FAR-designated bonds meet the index inclusion criteria.
HSBC Plc noted that India's inclusion will increase Asia's weight to 47.6% in the index, leading to a significant reduction in Europe, Middle East, and Africa (EMEA) region's weight.
The aggregate weight of EMEA emerging markets is expected to drop from approximately 32% to 26.2% by March when India's inclusion is complete.
Market demand
India's inclusion likely to boost demand for government securities
The heavy inflows associated with the index inclusion are expected to stimulate demand for Indian government securities in FY25.
While this development is seen as favorable for maintaining lower yields, analysts have noted that it could also lead to some bouts of volatility.
The total outstanding of bonds included in the index stands over $400 billion, making India's local debt stock one of the largest in EM, surpassed only by China.
Trading complexity
Trading environment complexity expected with foreign investment
As foreign investment in Indian bonds heads toward the 10% weight on the JP Morgan bond index next year, a more complex trading environment will be created.
Jain explained that when investors decide to go overweight, they will move toward 12% of the index, and when they go underweight, they will shift to 8%.
This 4% gap could regularly result in an inflow or outflow of $10 billion-$12 billion.