This morning was truly blessed as news of India’s newest achievement popped up in the News.
JP Morgan released exciting news on Friday morning, stating that it will include India in its widely tracked emerging market debt index, setting the stage for billions of dollars of inflow in the world’s fifth largest economy, no other than our Bharat.
So for people unfamiliar with the concept of government bonds, let’s dive into that first.
Government Bonds:
A government bond can be defined as a debt instrument that’s issued by the Central and State governments of India. The issuing of such bonds occurs when the issuing body(either the Central or State government) faces a liquidity crisis and requires certain funds for infrastructure development.
In its basic sense, the Government bond in India is essentially a contract between the issuer and the investor wherein the issue guarantees interest earning on the face value of bonds held by the investors along with repayment of the principal value on the stipulated date.
These are categorized as long-term investment tools and have issues for periods ranging from 5 -40 years.
Significance of Indian Bonds on the global scale:
Coming back to the topic at hand, India’s local bonds would be included in the Government Bond Index – Emerging Markets (GBI – EM) index and the index suite benchmark by about $236 billion in global funds according to JP Morgan.
Furthermore, they had conveyed that 23 Indian Government Bonds with a combined notional value of $330 billion are eligible and all of them fall under the category of “fully accessible” for non-residents.
JP Morgan reports that India’s weight is expected to reach the maximum weight threshold of 10% in the GBI – EM Global Diversified and approximately 8.7% in the GBI – EM Global Index
The inclusion will start on June 28, 2024, and extend over 10 months with 1% increments on its index weighting, as India has been expected to reach a maximum weight of 10%, JP Morgan said.
J.P Morgan’s Index Suite:
JP Morgan’s index suits cover a variety of asset classes ranging from emerging markets to development market bond indices.
The index consists of the J.P. Morgan Global Aggregate Bond Index (JPM GABI), Emerging Market Indices, Developed Market Indices and Credit Indices.
Whereas as per the announcement, Indian government bonds will be listed on JP Morgan Chase’s Emerging Market Indices.
The Emerging Market Indices by J.P. Morgan was formed in early 1990 after the issuance of the first Brady Bond and has become the most widely published and referenced index of its kind.
The recent development in their arsenal was the Government Bond Index – Emerging Markets ( GBI – EM) which provided a new standard for local markets and corporations.
International investors have easy access to the regularly traded, fixed-rate, domestic currency government bonds that make up the GBI-EM.
Will India benefit from this?
The Indian government had started the discussion on the inclusion of its securities in the global indexes as far back as 2013. However, at the time, its restriction on foreign investment in the domestic debt held that back.
Moving forward, in April 2020, the RBI introduced a ‘cluster of securities’ that were exempt from any foreign investment restriction under a “fully accessible route” making them eligible for inclusion in the global indexes.
Increased inflow into the Nation:
J P Morgan has said the Indian bonds would eventually hold a weight of 10% in its index. This inclusion could result in inflows of close to $24 billion over the 10 months as per analysts’ estimations. This is significantly higher than the $3.5 billion invested by foreign investors in Indian debt so far for the current calendar year. As per analyst estimation, the foreign holding of outstanding bonds could rise to a whopping 3.4% by April – May 2025 from the current 1.7%.
Reduce Government’s Borrowing Costs:
Indian fiscal deficit remains high at a targeted 5.9% of GDP for the year ending March 31, 2024, which may result in the government borrowing a record 15 trillion rupees. Until now, bask, insurance companies and mutual funds have been the largest buyers of government debt. With this inclusion, additional sources of funds will help cap bond yields and the government’s borrowing costs. Corporate borrowers would also benefit as their borrowing costs are benchmarked to government bonds.
The Potential Rise of the Rupee:
Larger debt inflows from the next financial year would make it simple for India to finance its current account deficit and reduce the pressure on the rupee. The index inclusion and inflows of close to $24 billion would cover a material part of India’s $81 billion current account deficit. As per the estimates by IDFC First Bank, for the next financial year, $1 would be equal to INR 82.8510.
A Note from Commodity Samachar:
Ankit Kapoor, Head of Research at Commodity Samachar had this to say about the new developments.
” This step can be considered as a great sign for the Indian economy amidst the propaganda and slander running against India when you look at it from a social perspective. Financial speaking, the Indian economy is currently moving forward at a consistent pace and is turning out to be an emerging country where investors are gaining benefits from investing. “
He further went on to say ” We anticipate more development to come in line with the same expectations. The Indian economy is also expected to grow by 9 % by 2027, and this new development is significant in bolstering India into the third position after the US and China.”
Commodity Samachar
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