Upstox Originals
4 min read | Updated on July 09, 2024, 18:34 IST
SUMMARY
India’s inclusion in the JPMorgan Emerging Market (EM) Bond has already brought in ~$10 billion in inflows into the debt markets and is expected to bring in a lot more. In this article, we understand this event better and take it a step ahead to see the spillover effects of this inclusion.
In September 2023, JP Morgan confirmed that Indian government bonds would be included in its Global Emerging Market Bond Index, starting June 28, 2024. From 1% initially, India’s weight in the index will rise to 10% by March 25 (the highest it can be).
Like all indices, a bond index is the collection of specific types of bonds. The JP Morgan Emerging Market Global Diversified Index was launched in 1999 and manages assets of ~$213 billion. It invests in emerging market debt instruments issued by sovereign and quasi-sovereign entities.
Any investor/portfolio manager who tracks the JPMorgan Index will now mandatorily need to include Indian bonds in their portfolio.
This should bring in FII flows upwards of ~$21 billion (10% of AUM) into the Indian bond market. Since the announcement, experts believe inflows to the tune of ~$10 billion have already come into the Indian debt markets.
Yes, they do. That said, this index will bring more stable or passive money into the markets. Also, as shown in the chart below, India remains a significantly under-owned market. With this move, experts believe, Indian ownership could gradually rise to anywhere between 3.5-5%.
Theoretically speaking, higher demand should drive the interest rates down. That said, given the global scenario right now (heightened inflation, economic growth challenges, global skirmishes) as well as the gradual nature of the flows, a direct impact on interest rates is unlikely.
We list below some key potential benefits of this move
Finally, we would also like to mention that government bonds will also be included in the Bloomberg EM Local Currency Government Index. While good news for sure, this index is smaller than the JP Morgan index so the impact is expected to be lower.
India's inclusion in major global bond indexes is a huge step forward for the country and the markets. This can potentially open the door to huge foreign investments, potentially lowering borrowing costs, spurring capital flows, and leading to better fiscal management.
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