JP Morgan India bond index inclusion impact: Weight cut likely for 3 EMs

To accommodate India's 10 per cent weight in the GBI EM index, HSBC said in a recent note, a reweighting will occur for other EM peers in the index, which will see a reduction in their weights.

Thailand, Poland and Czech are the three emerging market (EM) countries that are likely to see a cut in their respective weights in the J.P. Morgan Emerging Market Bond Index (GBI EM index) over the next 10 months, said analysts at HSBC in a recent note, as India government securities (Gsec) start getting included in this index starting June 28, 2024.

To accommodate India’s 10 per cent weight in the GBI EM index, wrote Himanshu Malik, senior global emerging markets rates strategist at HSBC in a recent note, a reweighting will occur for other EM peers in the index, which will see a reduction in their weights (see graphic below).

That said, Malik believes the reweighting impact will not be significant, given that India’s inclusion will be phased over a 10-month period. 

“We also find that reweighting is likely to be less meaningful for EM high yielders, given their market size, while the largest reduction in weights at the end of the 10-month period is likely to occur for Thailand, Poland and Czech,” he said.

Strong flows

India government bonds, meanwhile, have seen inflows of $10.4 billion since the inclusion announcement on September 21, 2023. In comparison, there were inflows of only $2.4 billion into Gsec in the first eight months of 2023 and annual foreign outflows of around $1 billion each in 2021 and 2022.

Country weights

Looking at the foreign inflows into Gsec since September 2023, index-eligible bonds, HSBC said, have seen inflows of only $8.3 billion and four off-the-run issues alone have received 66 per cent of investments. 

"Foreign positioning in most of the index-eligible Gsec is still lower than what is implied by their potential weights in the GBI EM index. In our view, a large part of inflows has yet to materialise through the inclusion process and such inflows are likely to be led by benchmark issues," Mailk wrote.

The size of Gsec market stands at $1.3 trillion with about 112 securities. However, foreign investment without any investment restrictions is permitted only in certain liquid benchmark securities, which are categorised as securities under the Fully Accessible Route (FAR). The Reserve Bank of India (RBI) classifies any new issuance in 5-year, 7-year, 10-year, 14-year and 30-year tenors under the FAR category. 

“Currently, there are 38 FAR issues (outstanding amount: $482 billion). Out of these, only securities with a residual maturity of more than 2.5 years, a minimum outstanding amount of $1 billion and non-green issues are eligible for inclusion in the GBI EM index. This leaves 28 securities eligible for index inclusion, which at current market value will carry a weighted average modified duration of 7.06, a weighted average maturity of 12.3 years, and a weighted average coupon of 7 per cent in the index,” HSBC said.

HSBC expects the 5-year, 7-year, 10-year and 30-year benchmarks could be the key target of foreign flows going ahead, given the low foreign positioning, their availability through auctions, and the relative increase in their index weight versus other bonds.