JPMorgan adding Indian bonds will see public finances scrutinised

Foreign exchange reserves, which are higher than last year, and the credibility of the regulators will work in favor of the South Asian country, CIO SBI Funds said

By Anup Roy

JP Morgan Chase & Co.’s plan to include Indian government bonds to its emerging markets bond index next year will draw scrutiny from foreign investors on public finances, particularly on efforts to cut the budget deficit.
 

While global asset managers play a small role in the Indian market, inflows have been picking up since the government loosened rules in 2020 on the bonds foreigners can own. India’s weighting will reach a maximum 10% in the JPMorgan’s benchmark index, which accounts for $213 billion in assets, once the government bonds are included from June next year. 

At 8.9% of gross domestic product, India’s combined government fiscal deficit is the highest among the 20 countries tracked under the JPMorgan Government Bond Index-Emerging Markets.

Global investors will pay attention to efforts by Prime Minister Narendra Modi’s government to reduce its deficit and debt, said Kotak Securities Ltd. economists led by Suvodeep Rakshit. 

“The index inclusion opens up India’s fiscal situation to a greater scrutiny, with spending quality, efficiency of tax and other receipts collection, and adherence to fiscal consolidation path being closely monitored,” they said. 

Since Modi came to power nearly a decade ago, his government has focused on reducing India’s fiscal deficit but the pandemic widened the gap to an unprecedented 9.2% of GDP in the year ending March 2021. The target for the current year to March 2024 stands at 5.9% and the government has pledged to cut down the gap to 4.5% by fiscal 2025-26. 

The inclusion “does subject the country to more scrutiny in terms of its monetary, fiscal and external account policies,” said Rajeev Radhakrishnan, chief investment officer for fixed income at SBI Funds, India’s largest fund manager with an asset base of over $93 billion. 

Foreign exchange reserves, which are higher than last year, and the credibility of the regulators will work in favor of the South Asian country, he said. 

Inflows into India’s government debt market could make the economy more dependent on global financial conditions, adding to volatility, said Pranjul Bhandari, an economist with HSBC Holdings. “Strong institutions-backed, rules-based policy making will become even more critical in such times,” she said.