What Does India's Inclusion In JPMorgan EM Index Mean? BQ Explains

After a long haul, JP Morgan Chase & Co. has included Indian government bonds in its benchmark emerging markets index starting June 28, 2024. This is most likely to bring in an influx of foreign money of as much as $25–50 billion into Indian markets, apart from the usual foreign fund inflows, according to various estimates.

The inclusion in global bond indices points at India's growing allure among foreign investors due to its geopolitical importance and also as Western nations are looking for alternatives to China. While the Ukraine war has led to Russia falling off the indices, China’s economic turmoil has hampered its attractiveness.

So far, the participation of overseas investors in the Indian government bonds market has been fairly low, but the country's resilience to external shocks has sparked interest in recent years. Foreign investors have bought Rs 25,262 crore worth of Indian government debt since April, according to data by National Securities Depository.

The country will have a maximum of 10% allocation in the index, according to a statement by JP Morgan. The process of inclusion will take place over 10 months at roughly 1% weight per month, it said. Currently, there are 23 India government bonds eligible to be added to the index, with a combined notional value of $330 billion.

For the Indian government, the inclusion will allow raising money from international investors and ease pressure on the domestic market. The inclusion of Indian bonds in global indices was first announced in the budget speech for 2021-22 in February 2021.

"India has been on Index Watch Positive since 2021 for inclusion into the GBI-EM, following the Indian government's introduction of the FAR program in 2020 and substantive market reforms for aiding foreign portfolio investments," JP Morgan said in the statement.

To enable smooth inclusion in global bond indices, the Reserve Bank of India had announced five securities maturing in 5, 10 and 30 years in March 2020. These securities are to be available to foreign investors without any limits through the fully accessible route. Under this scheme, eligible investors can invest in specified government securities without being subject to any investment ceilings.

Structurally, this will lower India’s cost of funding, improve the liquidity and ownership base of government securities. This would also boost India's ability to finance its fiscal and current account deficit going ahead.

The inclusion in JP Morgan's bond index may also open doors for India to be be added to other international gauges such as Bloomberg-Barclays Global Aggregate Index.

But before that, the Indian regulators need to overcome several hurdles such as taxation policies for foreign investors, access to market through the international central security depository like Euroclear and stringent capital controls.

A deadlock between Indian authorities and Euroclear over the latter’s demand to make changes in tax policies has been one of the reasons for delay in the inclusion. JP Morgan had clarified earlier that the access to Euroclear is not an index requirement, but it would improve the market’s accessibility and evade some key operational challenges.