Inclusion in JPMorgan bond index to deepen Indian debt market, lower cost of capital: Morgan Stanley

JPMorgan Chase & Co having decision to add Indian government bonds to its benchmark emerging-market index is likely to have favourable implications for India's external balance sheet, deepen debt markets and lower the cost of capital, according to Morgan Stanley.

In a significant development that could pull in foreign funds into India's debt market, JPMorgan Chase & Co last week announced it will add Indian government bonds to its benchmark emerging-market index starting June 28 in 2024. The inclusion of the index follows the Indian government's “substantive market reforms” for aiding foreign portfolio investments, the American multinational investment bank JP Morgan had said.

Explaining the macroeconomic implications of India's inclusion in the bond index, Morgan Stanley said greater foreign participation in India's bond market is likely to favourably influence India's macro-economic indicators.

“In the short term, we expect India's balance of payments surplus to rise, external funding pressures on the currency to lessen and liquidity to increase. Over the medium term, the cost of capital is likely to come down, bringing about sustained and productive economic growth through a virtuous cycle of investment,” the Morgan Stanley report 'India Economics and Strategy | Asia Pacific Macro-Implications of India's Inclusion in the GBI-EM Index' authored by Upasana Chachra, Ridham Desai, Bani Gambhir, Sheela Rathi and Nayant Parekh, noted.

The inclusion of Indian government bonds in the JPMorgan Government Bond Index-Emerging Markets index could be seen as yet another sign of its growing appeal to global investors as it continues to remain one of the fastest-growing major economies.

Morgan Stanley said the opening up of the sovereign bond market and resultant fund inflows are likely to be beneficial for the Indian equity returns due to the positive impact on growth and likely softening implication on interest rates. Sectorally, it is positive on financials and consumer discretionary.

Foreign investors are already making a beeline to place their bets in India's equity markets. Since March through August, foreign portfolio investors have remained net buyers in Indian stock markets. In September, however, the quantum of fund inflow had slowed and remained on the negative side.

So far in 2023, foreign investors have cumulatively put Rs 122,571 crore into the Indian stock markets. India's strong economic outlook, as forecast by various global agencies, seemed to have led to a renewed appetite for domestic stocks.

The Morgan Stanley report termed volatility in global commodity prices including oil, deterioration in domestic fundamentals -- high inflation or a slowdown in growth and uncertainty in the political environment and a slowdown of reform momentum as key risks. 

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