The keenly anticipated event in India's bond market is set to become a reality soon. JPMorgan Chase & Co. will add the domestic gilts to its benchmark emerging-market index from Friday.
Compelling reasons have already made global funds pile into the sovereign bond market since the announcement of the index inclusion.
The benefits on the domestic institutions and overseas players could come from multiple fronts. One among these is that the inflows triggered by the inclusion in the JP Morgan Government Bond Index–Emerging Markets aided the local currency to stand firm against its Asian peers while the dollar strengthened.
This could be the beginning of a domino effect that could make other institutions add Indian bonds to their watchlist. NDTV Profit decodes this milestone and what this could mean for the domestic market and investors.
How Will JPMorgan Inclusion Be Carried Out
The investment banking firm announced this landmark decision last September. The country is expected to reach the maximum weight of 10% in the index, the highest possible weightage.
With an inclusion of 1% weight per month, the addition of the gilts will be staggered over a 10-month period, starting June 28 through March 31, 2025, JPMorgan said.
Currently, 23 Indian government bonds with a combined nominal value of $330 billion are index eligible.
Inflow Picture So Far
Global funds have responded to the upcoming index inclusion enthusiastically and taken a bullish stance since the announcement. India's bond market has garnered overseas inflows of about Rs 1.06 lakh crore since last September. So far this year, foreign inflows into Indian debt stand at Rs 65,847 crore, and Rs 40,482 crore of inflows happened between September and December.
Through this inclusion, Indian bonds may see inflows of $25-50 billion, according to analysts. From the current 2.5%, JPMorgan estimates that foreign ownership of India's bond market will nearly double to over 4.4% of outstanding over the next 12 months.
Although initial investments are supposed to be to the tune of $25-30 billion, index inclusion paves the way for this number to keep growing in the next few years, according to Vishal Goenka, co-founder of IndiaBonds.com.
How Domestic Institutions Stand To Benefit
The already benefitting domestic institutions stand to gain the most on multiple fronts. Overseas inflows from the inclusion have cushioned the rupee's fall and helped the local currency hold firm against its Asian peers.
Rupee has been a better performer because of the robust investment inflows, particularly into the debt segment, and there remains an attractive yield differential, Kunal Sodhani, vice president at Shinhan Bank, told NDTV Profit earlier.
The potential domino effect of other inclusions could also boost the case for a sovereign ratings upgrade for India. But, in May, rating agency Moody's said this inclusion will not be enough to upgrade the country from the lowest investment grade as it needs structural reforms to improve its fiscal metrics.
Even while the global fund flows were net sellers in the equity segment during the year, positive inflows into bonds aided the overall inflows into India.
How Retail Investors, Corporate Stand To Gain
For retail investors, diversification into potential high-yielding and sovereign-backed returns could be a huge benefit, given the risk in other assets.
There could be enhanced market confidence and stability given that this inclusion will provide credibility to India's bond market, according to Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP. "This increased confidence can lead to more stable and predictable market conditions, benefitting individual investors who seek stable returns."
Further, retail investors could benefit as the yields are likely to decrease. This means they can purchase bonds at lower yields but potentially higher prices, benefiting from capital appreciation if they hold bonds or if yields continue to trend downwards, Srinivasan explained.
It is important to grow the investor base for any market, and index inclusion helps in expanding the number of players, Goenka said.
For the corporate sector, the benefits could mainly come in terms of lower borrowing costs and improved market liquidity, according to experts. "This can attract more foreign direct investment into the country, benefitting corporates by providing easier access to capital for expansion and development projects," Srinivasan said.
The Road Ahead
The chain reaction for other inclusions has already begun as Bloomberg said it will include the India Fully Accessible Route bonds in its Emerging Market Local Currency Government Index and related indices in a phased manner over a 10-month period from Jan. 31, 2025.
With a staggered inclusion in the JP Morgan index and a potential inclusion in other major institutions, foreign inflows are expected to remain elevated for the bond market.
Impact On Markets
The influx into the market has also kept bond yields steady. The erstwhile benchmark 10-year bond yield has fallen 2.34% since last September, while that of the US bond rose 3.23%.
Over the medium to long term, the inclusion in global bond indices is expected to sustain investment growth in India’s bond market, Srinivasan said. "This can lead to a more mature and resilient financial market, benefiting all participants including retail investors and corporates."
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