India's inclusion in JPMorgan's emerging-markets bond index will boost inflows
JPMorgan has announced the inclusion of India in its widely tracked Government Bond Index-Emerging Markets (GBI-EM) index, benchmarked by about $236 billion in global funds. This move is anticipated to trigger billions of dollars of inflows into the world's fifth-largest economy, starting June 28, 2024, and extending over ten months with 1% increments on its index weighting.
Paving the way for global investment
A total of 23 Indian Government Bonds (IGBs) worth a staggering $330 billion will be eligible for inclusion. This move, as predicted by JPMorgan, could lead to India's weight reaching a maximum threshold of 10% in the GBI-EM Global Diversified index and approximately 8.7% in the GBI-EM Global index. Such inclusion not only validates India's economic strength but also promises billions of dollars in inflows, presenting a vast pool of passive foreign funding.
Impact on the Indian Rupee
The Indian Rupee is expected to experience an immediate boost as a result of India's inclusion in JPMorgan's bond index. The rupee on Friday opened at around Rs. 82.82 against the US Dollar, climbing 27 paise up from its previous close at Rs. 83.09. The inclusion is seen as a substantial positive for the rupee, although analysts caution that the full impact of these inflows may take some months to materialize.
Inflows and economic prospects
Inflows of approximately $24 billion into eligible government bonds are expected between the start of next year and May 2025, according to IDFC First Bank. Furthermore, India's inclusion in the JPMorgan index could pave the way for its inclusion in the Bloomberg Global Aggregate Bonds Index, potentially leading to additional inflows of $15 billion to $20 billion.
Challenges ahead
Despite the optimism surrounding India's inclusion, there are challenges to be mindful of. The rising long-maturity US Treasury yields, currently at 4.50%, pose a potential obstacle. Expectations of a more prolonged period of higher rates by the US Federal Reserve have led to a stronger dollar, which could impact the rupee's gains. Additionally, the recent slump in US equities, with the S&P 500 index having its worst day since March, adds an element of uncertainty to the global financial landscape.
