Inclusion into JPM bond indices is just a beginning

While this is a game changing event increasing the liquidity and demand for the G-Secs bringing down the cost of capital, it could also bring the global volatility to our shores. The bond prices and their movement are highly influenced by the changes in global sentiments, economic conditions and policies

Last month, there was an announcement by JP Morgan Chase & Co that it will add Indian government bonds to its benchmark emerging market index from June 2024. The gradual increase of the index weightage to Indian bonds would reach the maximum threshold of 10 per cent in their Government Bond Index-Emerging Markets (GBI-EM) Global Diversified index and 8.7 per cent in the GBI-EM Global index fund. This would be done over a period of ten months with increase in the weightage by 1 percentage point each month.

This is a very exciting prospect for a deluge of dollar inflows. The JPM Government Bond Index-EM Global Diversified index has about $230 billion and the 10 per cent translates to about $23 billion of inflows into Indian bonds. This could lead others like Barclays and Bloomberg to consider adding to their indices tapping about $330 billion of assets ie, comprising the 23 Indian G-Secs.

Government bonds also called as Sovereign bonds or Government Securities ie, G-Secs are debt instruments issued by the government of India to raise capital for a defined period at a fixed interest rate. They’re considered practically risk-free as they’re backed by the government and are devoid of solvency risk.

The Indian G-Sec currently stands as a $1.2-trillion market, and it is predominantly held by domestic institutional investors like banks, insurance companies, etc. The current holding of these instruments is dominated by the banks with close to 67 per cent and only a miniscule, 1.6 per cent, held by the foreign investors. This is because of the unattractive returns for them as the premium yields are discounted by the forex hedging costs currently.

This inclusion is a flywheel to the India’s transformation into a $5-trillion economy within this decade. The inclusion of Indian G-Secs to these global indices not only helps to raise more funds but integrate the Indian economy with the world. This announcement was eagerly awaited as the geopolitical conditions were ripe with the exclusion of Russia due to the ongoing war with Ukraine. Moreover, the economic troubles in China have reduced the investor options with India being the lone large economy which withstood solidly in the post-pandemic conditions and is thriving economic performance.

While this is a game changing event increasing the liquidity and demand for the G-Secs bringing down the cost of capital, it could also bring the global volatility to our shores. The bond prices and their movement are highly influenced by the changes in global sentiments, economic conditions and policies. This helps in diversifying the ownership which is now predominantly domestic institutions and large buyers.

Also, important to note that the govt’s vision of National Infrastructure Pipeline requires about $1.5 trillion of investments and it can’t be only domestically sourced ie, instruments bought by banks alone.

Of course, the Reserve Bank of India (RBI) has been engaging with many of these index providers for the inclusion of Indian Government bonds in the global bond indices for some time. The RBI’s July ’23 report of the Inter-Departmental Group on Internationalisation of INR (Indian Rupee) has underlined that the benefits of index inclusion outweigh the associated risks linked to such index inclusion like increased sensitivity of domestic policy to external spill overs.

Overall this is a good omen for the Indian bonds which not only directly benefit the funding of the twin deficit (fiscal and current account) issues but also bring stability to the currency, Indian Rupee.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at knk

@wealocity.com)