Opinion India’s entry into JP Morgan bond index will boost capital flows, pose challenges for RBI

Being included in the index paves the way for billions of dollars of inflows, potentially lead to India’s entry in similar indices. This will provide a long-term source of financing for government securities, and help deepen the country’s integration in global financial markets

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The assets under management of funds tracking the index are $236 billion.

By: Editorial

September 25, 2023 12:19 PM IST First published on: Sep 25, 2023 at 07:10 AM IST

Last week, JP Morgan announced that Indian government bonds will be included in its emerging market bond index from June next year. This move was widely anticipated — India has been on the Index Watch Positive for inclusion since 2021.

Being included in the index paves the way for billions of dollars of inflows, that will help deepen the country’s bond market. It could also potentially lead to India’s entry in similar indices such as the Bloomberg and FTSE indices, which will only amplify capital inflows. This will provide a long-term source of financing for government securities, and help deepen the country’s integration in global financial markets.

The country is expected to reach a maximum weightage of 10 per cent in the GBI-EM Global Diversified Index, putting it at par with others like China, Brazil, Indonesia and Malaysia. The inclusion of Indian bonds will be staggered over a 10-month period, starting from June 28, 2024 to March 31, 2025, implying a 1 per cent increment to its weight every month.

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Almost two dozen bonds with a combined notional value of $330 billion will be eligible. The JP Morgan announcement detailed that 73 per cent of the benchmarked investors were in favour of the country’s inclusion in the index, while another 17 per cent were neutral. Along with this inclusion, India is also likely to enter other JP Morgan bond indices such as the JADE local currency bond index and the JESG GBI-EM index.

The assets under management of funds tracking the index are $236 billion. As per reports from various investment houses, post the inclusion, inflows into the country are likely to range between $24 billion to $30 billion. Being included in the other indices will push these numbers further upwards. As the passive inflows commence, active inflows could also gather steam — as per a report from Goldman Sachs, the country could attract $10 billion more in active flows.

There are expectations that the flows into India, stemming from its inclusion in the global bond indices, could exert a moderating influence on government bond yields, and also private sector bonds, thereby lowering the cost of capital in the broader economy. An increase in capital flows could ease concerns over the financing of the country’s current account deficit. Further, as inflows rise, they could help free up capital for the banking sector to lend. However, at the same time, this inclusion could also inject a degree of volatility in local debt markets, perhaps more so during times of global economic turmoil and uncertainty. It could lead to an increased scrutiny of government finances, and have implications for the domestic currency. The latter will complicate the policy choices before the Reserve Bank of India.

# JP Morgan