JPMorgan to include India in emerging market debt index: Key things you need to know

JP Morgan index to include India bonds: Shares of PNB Gilts jumped 20 per cent to hit their 52-week high of Rs 81.55 apiece on the BSE on Friday, September 22, after JPMorgan said it would include India in its widely tracked emerging market debt index, setting the stage for billions of dollars of inflows into the world's fifth-largest economy.

India's local bonds will be included in the Government Bond Index—Emerging Markets (GBI-EM) index and the index suite, benchmarked by about $236 billion in global funds, according to JPMorgan.

JPMorgan said 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are eligible. All fall under the category of "fully accessible" for non-residents.

Among listed asset management companies (AMCs), Nippon Life India Asset Management ended 0.81 per cent higher at Rs 330 levels. HDFC Asset Management Company rose in the early trade; however, it ended at Rs 2,658, down 0.66 per cent on the BSE.

Banking stocks also traded in the green. The S&P BSE BANKEX index ended at 50,201.45, up 0.06 per cent. Canara Bank (up 5 per cent) was the top gainer on the index, followed by Bank of Baroda (up 4 per cent), and IndusInd Bank (up nearly 3 per cent).

Commenting on India's inclusion in the JP Morgan Emerging Markets Bond Index, Ajay Seth, the Secretary of the Department of Economic Affairs, said, "It is a welcome development showing confidence in the Indian economy."

Echoing similar views, Nilesh Shah, MD, Kotak Mahindra Asset Management Company Ltd, said, “India’s inclusion in the bond index is a step in the right direction. With the exclusion of Russia and troubles in China, the options for global debt investors have narrowed down. Hopefully, rating agencies will respect investors' viewpoints and give up on their moody and poor standards. This inclusion will deepen the bond market in India.”

PNB Gilts' views

Following the development, Vikas Goel, the managing director at PNB Gilts, said in an interaction with the Zee Business channel that it is good news for the bond and currency markets as well as for the company, both in the long and short term. For the time being, the inclusion may see an inflow of 24 billion dollars.

Goyal added that other indices may also include India in the coming days. The upcoming year is expected to be a good one for the Indian bond market. Asset management companies (AMCs) and insurance companies are also part of the market, which are expected to react positively to the development, the MD added. Goyal mentioned that JP Morgan had said in a note that the index would be restructured. "Most of the liquid bonds are freely accessible," PNB Gilts MD added.

Goyal further said that, due to a fall in yields, bond prices have risen. At the time of writing this report, India's 10-year bond yield traded 0.32 per cent lower at 7.113 levels. In the opening deals, the yield slipped by as much as 0.5 per cent.

What does PNB Gilts do? 

PNB Gilts Ltd is a subsidiary of Punjab National Bank. As a primary dealer, the company's primary activities entail supporting government borrowing programmes via the underwriting of government securities issuances and trade in a gamut of fixed-income instruments such as Government securities, Treasury Bills, State Development Loans, Corporate Bonds, Interest Rate Swaps and various money market instruments such as Certificates of Deposits, Commercial Papers etc.

India's bond inclusion in JP Morgan index: A little more detail

India will enter the JPMorgan Global Bond Index. As much as 73 per cent of benchmark investors are in favour of including India in the JP Morgan Bond index. India will be included in the GBI-EM index on June 28, 2024. For the time being, 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion will be included in the index. Further, JP Morgan said that at the start of the inclusion on June 28, 2024, only Fully Accessible Route (FAR)-designated IGBs with a maturity date after December 31, 2026, will be assessed for eligibility.

"India's weight is expected to reach the maximum weight threshold of 10 per cent in the GBI-EM Global Diversified and approximately 8.7 per cent in the GBI-EM Global index," said JPMorgan.

According to the JP Morgan note, the Asia (ex-Japan) local currency bond index (JADE Global Diversified) will include India (over the same rebalance time frame as the GBI-EM GD), and it is expected to have a weight of 18.48 per cent. Meanwhile, for the JADE Broad Diversified index, India's weight will increase from 10 per cent to 20 per cent in the JADE Broad Diversified index over the 10-month phasing period. Every month, the weightage will increase by 1 per cent for 10 months.

Due to their inclusion in the index, bond yields are expected to increase between 8 and 33 bps. India's bond market size is more than Rs 1 trillion.

What will be the impact? 

Rakeshh Mehta chairman of Mehta Equities Ltd
 
“India’s inclusion in JP Morgan emerging markets bond index is great news which would give a booster access to global investors to participate in the world’s fastest-growing large economy that would offer them the highest alpha returns in the emerging region. I believe it is after waiting for 10 odd years India has finally been included in the JP Morgan EM Bond Index today effective 28th June 2024. The credit goes to the Govt of India regulator as well as various government organisations who made this possible in the current scenario. The news has come at the right time when the market is under pressure and hereafter the possibility of larger FPI flows could be seen ahead of this inclusion. The Rupee would also benefit from this news. We continue to remain optimistic about a great Indian long-term story. Equity markets would take this as a welcome note at the right time.”

Anuj Gupta, HDFC Securities, Head - Commodity & Currency

The outlook for the Indian rupee has received a welcome boost from the bond market. The inclusion of Indian government bonds into JPMorgan’s benchmark emerging-market index is positive news for the currency, especially at a time when the current account is deteriorating. The index provider will add Indian securities to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024. The bond inflows will be significant. Indian bonds will have a maximum weight of 10% in the index and estimates suggest flows could be as much as $20b-$25b.

Emkay Global

The brokerage says that apart from the passive flows owing to the one-time stock adjustment, this move could lead to fresh active flows in the debt market, which remains underpenetrated on external financing. This will not only result in lower risk premia but also help India to finance its fiscal and current account deficit (CAD) as well as enhance the liquidity and ownership base of G-Secs. 

Beyond the near-term euphoria, this should structurally augur well for rates and FX markets, leading to lower cost of borrowings for the economy at large and more accountable fiscal policy-making. "We see upside risk to our FY24E BoP surplus of USD10-12 bn, but keep an eye on net flows, which may be influenced by factors other than bond inclusion (such as global risk appetite, and external growth dynamics)," the brokerage added.

With inputs from Zee Business Research