Indian Government Bonds in JP Morgan Index

Indian Government Bonds in JP Morgan Index

Sub: Economy

Sec: External Sector

Inclusion and Timeline:

• The inclusion of Indian Government Bonds (IGBs) in JP Morgan’s emerging markets bond indices will start on June 28, 2024.
• This inclusion will be phased over 10 months until March 31, 2025.
• Expected to bring in $20-25 billion over this period.

Impact on Indian Economy:

• The inflows will help India manage external finances and boost foreign exchange reserves.
• Reserve Bank of India (RBI) will need to use instruments to manage the resultant inflationary pressures.

JP Morgan’s Announcement:

• Announced in September last year.
• India to be included in the GBI-EM Global index.
• 23 IGBs meet the eligibility criteria.
• India is expected to reach the maximum weight of 10 percent in the GBI-EM Global Diversified Index (GBI-EM GD).
• Analysts expect $2-3 billion flows to India every month.

Eligibility Criteria:

• Eligible instruments require a notional outstanding above $1 billion and at least 2.5 years of remaining maturity.
• FAR-designated IGBs issued during the phase-in period will also be included.

Estimated Inflows:

• Estimates range between $20 billion to $25 billion in the 10-month period.

Market Impact:

• An HSBC report noted $10.4 billion inflows since the inclusion announcement.
• Foreign portfolio investors have purchased $8.06 billion of Indian debt.

Effect on Bond Market:

• Likely to lead to fresh active flows in the debt market.
• Will help India finance its fiscal and current account deficit (CAD).
• Enhance liquidity and ownership base of government securities (G-secs).

Challenges for RBI:

• RBI has tools to manage the impact of inflows.

Additional Inclusions:

• Indian government bonds to be included in the Bloomberg Emerging Market (EM) Local Currency Government Index from January 31, 2025.

JPMorgan Government Bond Index-Emerging Markets (GBI-EM)

• Benchmark Index: Tracks the performance of local-currency-denominated sovereign bonds issued by emerging market countries.
• Purpose: Provides investors with a representative measure of the fixed income market within emerging market economies.
• Inclusion: Comprises government bonds issued by various emerging market countries.
• Dynamic Composition: The composition may change over time based on eligibility criteria.

India’s Inclusion:

• Eligible Bonds: JPMorgan has identified 23 Indian government bonds with a combined nominal value of USD 330 billion for inclusion in the GBI-EM.
• Weight in Index: India’s weight is expected to reach the maximum threshold of 10% in the GBI-EM Global Diversified, and approximately 8.7% in the GBI-EM Global index.
• Benchmark Impact: India’s local bonds will become part of the GBI-EM index and its suite of indices, which serve as benchmarks for approximately USD 236 billion in global funds.

Significance of India’s Inclusion in GBI-EM Index

Enhanced Investment Attractiveness:

• Coveted Destination: Positions India as an attractive investment destination.
• Potential Inflows: Expected to attract substantial inflows of USD 45-50 billion over the next 12-15 months.

Economic Stability and Financing Ease:

• Funding Alternative: Eases financing constraints related to India’s fiscal and current account deficits.
• Lower Risk Premia: Reduces India’s risk premia and funding costs, fostering economic stability.
• Risk Premia: The additional return expected from a risky asset over a risk-free asset.

Fully Accessible Route (FAR)

Brief:

• Introduction: RBI has introduced the Fully Accessible Route (FAR) to enable non-residents to invest in specified government bonds.

Key Features:

• Investment: Eligible investors can invest in specified government securities under FAR without any investment ceilings.
• Existing Routes: Operates alongside the Medium Term Framework (MTF) and the Voluntary Retention Route (VRR).

Benefits:

• Ease of Access: Substantially eases access for non-residents to Indian government securities markets.
• Global Bond Indices Inclusion: Facilitates inclusion, enhancing the visibility of Indian bonds in international markets.
• Stable Foreign Investment: Encourages stable foreign investment inflows into government bonds, promoting financial stability.

Voluntary Retention Route (VRR)

Brief:

• Introduction: RBI introduced the Voluntary Retention Route (VRR) to encourage Foreign Portfolio Investors (FPIs) for long-term investments in Indian debt markets.

Key Features:

• Aggregate Investment Limit: ₹40,000 crores for VRR-Govt and ₹35,000 crores for VRR-Corp.
• Minimum Retention Period: Three years, during which FPIs must maintain a minimum of 75% of the allocated amount in India.
• Operational Flexibility: Greater flexibility in terms of instrument choices and exemptions from certain regulatory requirements for FPIs.