JPMorgan Investor Summit: India Bonds Will Reflect Macro Realities With EM Index Inclusion, Says Jahangir Aziz

With India's inclusion in the JPMorgan Chase & Co.'s emerging market index, the country's bond market will be more reflective of the "macroeconomic realities", according to Jahangir Aziz.

Participation of foreign investors will broaden the base for the Indian government to source funding, Aziz, head of emerging markets economics research and commodities at JPMorgan, told BQ Prime on the sidelines of the JPMorgan India Investor Summit. This, in turn, will ensure a better price discovery for the Indian debt, he said.

"Price discovery and market discipline from the government will make a much more resilient and stronger bond market over a period of time," Aziz said, explaining that a larger pool of investors would make the Indian debt market more prone to external liquidity shocks.

"Over a period of time, say 2-4 years, Indian bonds will start reflecting the macroeconomic realities...finally you will have a set of investors who can move out of the bond market if the fiscal discipline is not maintained," Aziz said.

In 2024, India's general elections will result in a spurt in government spending, which usually affect fiscal balances. However, the market players should look beyond such spending announcements, according to him.

The Indian rupee has fallen by 2% against the U.S. dollar in the last one year, due to strong U.S. dollar. But its strength among Asian peers, going by the real effective exchange rate, is not much of a concern for the country's trade competitiveness, Aziz said.

"A significant portion of our trade is invoiced in dollars. As long as the dollar's price does not move very much, there is not that amount of impact on trade," he said. The bigger worry is the global demand, according to him.

Beyond 2024, Aziz foresees a faster and deeper slowdown in demand, which is essential to lower the core inflation. India's core inflation, which strips out food and energy prices, was at 4.9% in July.

"The current disinflation is because of China. Their export prices are at -15% in dollar terms, as their fiscal policies are biased towards supply side," Aziz said. "Not just India, anyone who has China as major importer, has significantly benefited from this."