JP Morgan Index a shot in the arm for India

Starting from June 2024, JP Morgan is set to incorporate Indian bonds into the global bond index.

In a major development for the Indian economy and the overall outlook of the rupee, starting from June 2024, JP Morgan is set to incorporate Indian bonds into the global bond index. This move is likely to bring significant benefits to India, estimated to be in the range of $20-40 billion over the next 18 to 24 months.

JP Morgan declared on Friday that India Government Bonds (IGBs) will be incorporated into its EM bond benchmark, a move supported by 73 percent of investors. India has been under consideration for inclusion in the GBI-EM since 2021, following the introduction of the FAR program by the Indian government in 2020 and significant market reforms aimed at facilitating foreign portfolio investments.

A government bond is a financial instrument issued by the government to fund public expenditures or to settle existing debts. These bonds serve as a means of government funding, complementing tax revenues.

With Indian govt bonds becoming accessible to foreign investors and a strengthening rupee, this development is expected to provide a boost to the Indian economy. According to Goldman Sachs, the inclusion of India could lead to passive inflows of approximately $30 billion.

Following JP Morgan’s decision, there is growing anticipation regarding the potential inclusion of Indian bonds in other major global bond indices. This decision has the potential to drive an inflow of over $25 billion in the next two years. It is also expected to lead to a decrease in bond yields and provide support for the currency.

Following the announcement, India bond yields initially surged by 6 to 7 basis points on Friday, only to retrace 3 basis points of those gains later.

Foreign investors have been eager to invest in India’s equity markets. From March to August, foreign portfolio investors consistently registered as net buyers in Indian stock markets. However, in September, the rate of fund inflow decelerated.

The inclusion of Indian bonds in the JP Morgan index is a significant development for the Indian economy. It is expected to attract billions of dollars of foreign inflows into the domestic government securities market, boost the Indian rupee, and make it more attractive for foreign investors. It is also expected to help the Indian government to reduce its borrowing costs.