Indian govt bonds now part of JP Morgan's bond index. Here's what it means

Indian government bonds enter JP Morgan's GBI-EM Index, expected to attract $30 billion in inflows

On Friday, India officially became part of JP Morgan's Government Bond Index-Emerging Markets (GBI-EM). This move follows an announcement made in September, setting the stage for significant financial inflows into the world's fifth-largest economy.

Starting today, Indian Government Bonds (IGBs) will begin to be included in the index, with a one-per-cent weight being transferred initially. This weight will increase by one percentage point each month until it reaches a cap of 10 per cent by March 31, 2025. As a result, India will join the ranks of China, Indonesia, and Mexico, each with a maximum cap of 10 per cent in the JP Morgan Global Bond Index - Emerging Market Global Diversified Index.

 

Foreign investors have already directed around $10 billion into securities eligible for the index since the announcement. Goldman Sachs projects at least $30 billion more in inflows as India's index weighting rises to 10 per cent. This steady increase is likely to keep Indian bond prices strong.

What is the JP Morgan Emerging Market Index?

The JP Morgan Emerging Market Bond Index (EMBI), created in the early 1990s, is the most widely referenced index for emerging market bonds.

It began with the issuance of the first Brady bond and has since expanded to include the Government Bond Index-Emerging Markets (GBI-EM) and the Corporate Emerging Markets Bond Index (CEMBI).

These indices have become benchmarks for local market and corporate EM bonds. Region-specific indices, such as the JP Morgan Asia Credit Index (JACI), the Russia Bond Index (RUBI), and the Latin America Eurobond Index (LEI), provide further coverage.

What is the significance of JP Morgan’s index?

The JP Morgan Emerging Market Global Diversified Index manages about $213 billion in assets globally. India's 10 per cent weight in the index is expected to attract $21 billion (Rs 1.7 trillion) in investments by March 31, 2025, assuming investors initially had zero weight in Indian bonds.

This inclusion could prompt other EM index providers, like Bloomberg and FTSE, to consider adding India, potentially leading to additional inflows into the economy.

Eligible Indian government bonds

Only Indian Government Bonds (IGBs) issued under the Reserve Bank of India's 'Fully Accessible Route (FAR)' are eligible for inclusion in the indices. These bonds must have a minimum outstanding amount above $1 billion and at least 2.5 years of residual maturity, making all FAR-designated IGBs maturing after December 31, 2026, eligible.

Impact of India’s inclusion on financial flows

India's inclusion in the JP Morgan Emerging Market Global Diversified Index is expected to result in $23.6 billion in inflows into Fully Accessible Route (FAR) bonds. Foreign Portfolio Investor (FPI) holdings of outstanding FAR bonds could rise to 3.4 per cent by April/May 2025.

Effects of India’s inclusion on other emerging markets

The inclusion of Indian government bonds will likely lead to a reduction in the weights of Thailand, Poland, and the Czech Republic in the JP Morgan Emerging Market Bond Index over the next 10 months.

Since the inclusion announcement on September 21, 2023, Indian government bonds have seen $10.4 billion in inflows, compared to just $2.4 billion in the first eight months of 2023 and annual foreign outflows of around $1 billion in 2021 and 2022.

India's entry into JP Morgan's GBI-EM marks a significant development for the country's financial markets, heralding increased investment and potentially greater stability for Indian government bonds.