Indian Bonds May See $25-50 Billion Inflows On JPMorgan EM Index Inclusion
Indian government bonds will be included in the Global Bond Index-Emerging Markets index suite, JP Morgan said.
The Indian government bond market may experience significant foreign fund inflows, pulling the yield curve lower after JPMorgan said it will add the country's sovereign bonds to its emerging markets index.
Indian government bonds will be included in the Global Bond Index-Emerging Markets index suite, JPMorgan said in a Sept. 21 note. India is expected to reach the maximum weight of 10% in the GBI-EM. Currently, 23 Indian government bonds with a combined nominal value of $330 billion are index-eligible. The inclusion of the IGBs will be staggered over a 10-month period starting June 28, 2024, through March 31, 2025, with an inclusion of 1% weight per month, the note said.
The GBI-EM Global Diversified accounts for $213 billion of the estimated $236 billion benchmarked GBI-EM family of indices, JPMorgan said.
India entering the GBI Global Diversified bond index and other smaller JPM EM indices could prompt overall about $26 billion of passive inflows as a one-off stock adjustment over the scale-in period, while actual flows may be higher, depending on market dynamics, according to Madhavi Arora, lead economist at Emkay.
India is also expected to enter other JPMorgan bond indices—the JADE Global Diversified Index, the JESG GBI-EM Index, and other aggregate suites of local currency indices—says Gaura Sen Gupta, India economist at IDFC First Bank.
Considering the AUM of funds tracking the JPMorgan GBI-EM family of indices is $236 billion, the index inclusion could result in inflows of $23.6 billion into Fully Accessible Route G-secs starting next year and completed by April or May 2025, according to estimates by Sen Gupta. FPI holdings of outstanding G-secs could rise to 3.4% by April or May 2025, compared to 1.7% in September 2023, she said.
Post-inclusion into the JPMorgan EM Bond Index, India’s chances of inclusion into the Bloomberg Global Aggregate Index also rise. If India is included in the Bloomberg Global Aggregate Index, it could result in inflows of $15 billion to $20 billion, with India’s weight ranging from 0.6% to 0.8%, she said. Given the relatively small weight, India’s inclusion could take place in one go, in case index inclusion takes place. Moreover, in the Bloomberg Global Aggregate Index, the country’s weight will continue to rise as the market capitalisation of fully accessible route securities rises, she said.
"There are three EM bond indices: the JPMorgan EM bond index, the FTSE EM index, and the Bloomberg Barclays EM bond index. We can estimate total flows to be a minimum of $40–50 billion in the medium term (6–12 months) if IGBs get included in all three indices," Satyakam Gautam, a rates trader at ICICI Bank, wrote in a LinkedIn post. This is a significant number because it not only provides an alternative source of financing for government borrowings, but it also opens up the space for corporate issuers and brings the entire yield curve down significantly once all the inclusions are in place, he said. National banks' balance sheets will also be freed up to allocate more funds to the private sector. It also places a significant amount of fiscal responsibility on the government since these flows are now closely following its fiscal prudence, Gautam wrote in his post.
Bonds And Rupee
The index inclusion rumours have helped India bonds stay afloat, even as most of the EM universe has followed a global bond sell-off since April 2023, said Arora of Emkay.
Thus, as initial euphoria fades, the 10-year yield may reverse gains after having nearly reached our initial target of 7.05% by the end of September 2023, tracking global yields and Brent prices. However, the trend could again reverse in favour of bonds by the end of March 2024, with the 10-year yield coming off comfortably at sub-7%, Arora said.
Indian rupee, meanwhile, has behaved relatively well, helped by the RBI, despite the widening trade deficit, higher Brent prices, and FPI equity outflows. Near-term, the balance of risk is tilted to a mildly weaker rupee, Arora said. She forecasts the dollar-rupee to range between Rs 82.25 and Rs 84.25 in the second half of FY24.
The move is also expected to help India finance its fiscal and current account deficits as well as enhance the liquidity and ownership base of G-secs, Arora said. Beyond the near-term euphoria, this should structurally augur well for rates and FX markets, leading to lower borrowing costs for the economy at large and more accountable fiscal policy-making.
