India is becoming more attractive as a place for investment and is on track to become a major global economy. All the hard work over the past decade by the government and regulators is showing results. JP Morgan, a leading financial institution, has decided to list India on its Government Bond Index for Emerging Markets (GBI-EM).
This inclusion will start from June 28, 2024. It will take place over ten months, with the index weighting for India increasing by 1% each month. JP Morgan expects that India will eventually hold a 10% weighting on the GBI-EM index.
What Is JPMorgan’s Government Bond Index — Emerging Markets?
The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) is a comprehensive benchmark for emerging market debt. It tracks local currency bonds issued by governments of various emerging markets. Launched in June 2005, this index enables global investors to closely examine local markets in search of higher yield and greater diversification opportunities.
Key Points
- The Indian Government has about 24 types of bonds that could be part of the Emerging Market Government Bond Index. These bonds are worth around $330 billion.
- Once India is a part of this bond index, it could receive between $45 and $50 billion in the next 12 to 15 months.
- To give an idea of how big this is: in the last ten years, India got about $40 billion from bond inflows. This is less than 2% of the total value of the bonds.
- But keep in mind, the annual bond inflows can change due to various factors and the momentum of active and passive flows.
Will The JPM Index Inclusion Automatically Lead To India’s Inclusion In Other Indices?
- Not all global bond indices will automatically include India, just because the JPM Index did. Two examples of these indices are the FTSE EM Index and the Bloomberg Barclays EM Bond Index.
- They have strict procedures and conditions that India might find challenging to meet. For instance, they require clear solutions for operational issues like custody and settlement, and also on tax and Euroclear matters.
- However, if India’s government bonds do get included in these benchmark bond indices, it can attract more consistent inflows from larger investment portfolios.
The Advantages For India In Joining JP Morgan’s Government Bond Index
- Joining JPMorgan’s Government Bond Index could lessen the pressure on India’s commercial banks. They won’t have to buy as many government bonds, freeing up resources to lend to businesses and individuals.
- India is working hard to improve its infrastructure, critical for boosting its manufacturing sector. Joining the index can help fund these upgrades by attracting investment in government securities.
- Being part of the index doesn’t guarantee large cash inflows. India’s overall economic health is more important. However, this move could certainly aid in attracting investors.
- As public debt continues to rise at a faster pace than the savings rate, the inclusion of bonds can offer a valuable and sustainable means of financing through investments in government securities. This not only addresses the need for long-term funding but also ensures financial stability and robustness in the economy.
- Corporations will reap the rewards as the entire yield curve shifts downward, reducing the long-term cost of financing. With positive sentiments and ongoing momentum, corporate bond spreads will narrow and remain under control.
- JPMorgan’s support could influence other major indexes like FTSE-Russel and Bloomberg-Barclays to include India.
China, already part of these indexes, has seen increased foreign investment as a result. It’s yet to be seen if India will experience similar benefits.
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