Why India’s Planned Inclusion In JPMorgan Bond Index Will Have 'Profound Impact'

Indian bonds, the rupee and some stocks are set for big gains after JP Morgan said it will add India to its benchmark emerging market bond index.

The Bombay Stock Exchange building in Mumbai. Photographer: Dhiraj Singh/Bloomberg

Indian bonds, the rupee and some stocks are set for big gains after JP Morgan said it will add India to its benchmark emerging market bond index.

Benchmark 10-year yields drop four basis points to 7.13%, while the rupee gains 0.2% to 82.9275 per dollar.

The much anticipated announcement is the first by any global bond index compiler, and is expected to bring in billions of dollars of inflows to the nation’s $1 trillion government debt market starting next year. Capital inflows are likely to rise in the next few months even ahead of the actual index flows as investors seek to front-run the eventual moves.

FTSE Russell announces reviews to its fixed income indexes later this month. Bloomberg LP is the parent company of Bloomberg Index Services Ltd., which administers indexes that compete with those from other service providers.

Here’s what analysts are saying:

  • Morgan Stanley’s Min Dai, head of Asia macro strategy wrote the index inclusion “will have a profound impact on India’s bond market in the short and longer term”
    • “Only 30% of GBI-EM investors have actual India exposure in their portfolios, according to our proprietary database. Hence, the timing of the announcement is a nice surprise”
    • Index inclusion could prompt further reform from Indian authorities in the next few months
    • “We like long 10-year bonds outright without FX hedge and we also add a bond to our paying 5-year overnight indexed swap trade as we expect the asset swap to tighten”
    • Annual inflows into the G-sec market beyond the inclusion could be $18.5 billion; the “internationalization of INR” and the reform of India’s capital market could lead to SDR inclusion for INR in the end
  • Citi’s Samiran Chakraborty, economist at the bank expects 10-year yields to ease to 6.80% in the coming months
    • India OIS rates are likely to come off faster in the near term, as swap hedges to bond positions get unwound amid JPMorgan Chase & Co.’s decision to add the country to its key index
  • Standard Chartered’s Nagaraj Kulkarni, co-head of Asia rates ex-China, says “foreign investors will have access to a large, idiosyncratic factors-driven market, while domestic investors will welcome investors with varying risk-return preferences.”
  • IDFC First’s economist Gaura Sen Gupta says bond supply dynamics for second half of the fiscal year were already favorable, and yields could fall below 7% by March if Bloomberg Global Aggregate Index also adds India
    • Total demand from banks, investors and index related flows will likely account for over 90% of net supply in FY25, meaning demand for bonds “could exceed supply by 900b rupees next year”
    • Cuts outlook for USD/INR trading range to 81.50-83.50 for the rest of the financial year from 82-84 earlier
  • Societe General’s Asia strategist, Rajat Agarwal says “at a time when global bond yields are rising and the discount rate for global equities is rising, the same for Indian equities will come down following the index inclusion”
    • “Investors that have been complaining about the expensiveness of Indian equities will now see valuations becoming more affordable as the discount rate heads lower”
    • “All rate-sensitive sectors including those involved in capital expenditure space will benefit from the index inclusion and subsequent lower cost of capital”

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