Indian bonds, and rupee surge post inclusion in JPMorgan EM bond index

The Indian rupee and government bonds experienced a surge on Friday following the announcement by JP Morgan to include India in its widely tracked emerging market bond index. Specifically, JP Morgan has added India to its flagship Global Bond Index-Emerging Markets (GBI-EM) Global Diversified Index.

The yield on the benchmark 10-year bond increased by five basis points in morning trading, settling at 7.11 per cent, compared to 7.16 per cent the previous Thursday. Concurrently, the rupee appreciated to Rs 82.77 per US dollar in early trading, up from Rs 83.09 on Thursday.

Market experts are projecting approximately $30 billion in inflows into the government bond market following India's inclusion in the index.

 

India is scheduled to join the index with a 1 per cent weighting in June 2024. This weighting will increment by 1 per cent each month until it reaches 10 per cent in April 2025, making India the second-largest emerging market country in the index, trailing only China.

Also Read: JPMorgan index inclusion shows confidence in India's economy: Ajay Seth

A report from JP Morgan indicated, "In the short term, we expect the 10-year Government Security (G-sec) and the Indian Rupee (INR) to outperform. We favour long 10-year G-sec outright without foreign exchange hedging, and we are adding a bond to our paying 5-year Non-Deliverable Overnight Indexed Swaps (NDOIS) trade as we anticipate the asset swap to tighten."

"In the medium term, we anticipate investors will pre-position themselves prior to the index inclusion in June 2024. Over the longer term, this could catalyse further index inclusions, such as joining the Bloomberg Global Aggregate Index, potentially attracting an additional $10 billion in inflows. The annual inflows into the G-sec market, following the inclusion, could amount to $18.5 billion. The internationalisation of the INR and the reform of India's capital market could culminate in Special Drawing Rights (SDR) inclusion for the INR," the report continued.

This inclusion will likely improve market liquidity, attract a broader investor base, reduce transaction costs, and offer more flexibility in investment decisions. Additionally, it bolsters India's standing and credibility in the international financial arena, highlighting the country's commitment to transparency and financial stability.

Inclusion in the index draws the attention of foreign investors who monitor these indices and augments India's access to international capital markets. Furthermore, this move could reduce borrowing costs for the Indian government and private borrowers. The currency conversion process resulting from foreign investment could also bolster demand for the Indian rupee, aiding its stabilisation.

VRC Reddy, head of treasury at Karur Vysya Bank, stated, "India's inclusion in the JP Morgan Global Bond Index-Emerging Markets holds positive implications for the interest rates market in the medium to long term and is favourable for the Dollar-Rupee exchange rate. While the bond market will likely deepen and widen, it will also be more exposed to volatility during adverse domestic and global events. In the short term, the euphoria surrounding this news is expected to dissipate within a day or two, giving way to fundamental factors and supply-demand dynamics."