JPMorgan EM Bond Index Inclusion: Here's What Analysts Are Expecting

With the JPMorgan EM Bond Index inclusion just a day away, foreign inflows are expected to a see a bump up, especially in the short term, according to analysts.

JPMorgan Chase & Co. will add the domestic gilts to its benchmark emerging-market index on Friday. 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. Since the announcement, Indian debt markets have already attracted $10.4 billion of foreign investments, with the inclusion expected to bring in upwards of $20 billion of foreign investments over the next few months.

Investors have largely shrugged off election results, with equity markets recouping loss to head to a new high, while benchmark bond yields continue to ease on fresh inflows ahead of the JPMorgan index inclusion, said Radhika Rao, economist at DBS bank. "Expectations are that the phased inclusion (gradual increase in weight) might see passive funds adjust their portfolios to reflect the recommended debt mix, resulting in $2 billion inflows in short order," Rao said.

These flows are likely to get a shot in the arm from signs of continued fiscal prudence in the final Budget, scheduled to be tabled next month, Rao said.

Any large inflows are unlikely in the short term, said Manpreet Gill, chief investment officer at Standard Chartered Bank. Instead, flows are expected to see a gradual rise, as the weight of the index increases, he said, adding that the idea is a sustained focus over a period of time.

Still, the day is expected to see higher volumes, according to Arvind Chari, chief investment officer at Q India UK. Passive indices that track the JPMorgan EM bond index, will take positions tomorrow post the inclusion, he explained.

Beyond the index inclusion, supply-demand dynamics will be under watch when the fiscal 2025 Budget is tabled, Rao said, adding that an increase in the scale of borrowings versus what was outlined back in the interim budget is unlikely.

Index eligible bonds have recorded inflows of only $8.3 billion and four off-the-run issues alone have received 66% of the foreign investments, according to a research note by HSBC. "In our view, a large part of inflows has yet to materialise and this is likely to be led by benchmark issues," the note said.

While the Indian rupee has seen a depreciating bias in recent weeks, it continues to outperform regionally on year-to-date basis. With the RBI likely to continue to intervene on the rupee, it is likely to range between 83.30-83.60 against the dollar in the near term, according to Dhiraj Nim, economist at ANZ Research.

"Our forecasts are for 10-year yields to end the year below 7% and the rupee to rise towards 83 against the dollar, premised on a weaker US dollar index, hinging on the call for modest rate cuts by the US Fed," Rao said.