JPMorgan bond index inclusion

JPMorgan bond index inclusion

Subject: Economy

Section: External sector

Source: TH

Context: JPMorgan on Friday said it will 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.

Impact of JPMorgan bond index inclusion

• It can boost foreign fund flows into the debt market
• It will lower India’s cost of funding
• It will enhance the liquidity
• It will broaden ownership base of Gsecs
• It will bolster the rupee
• It will lower the cost of borrowing for government, corporates, and banks
• It can help to finance its fiscal and current account deficit.

Details

India will be included in JP Morgan’s GBIEM Global index suit e from June 28 next year. India’s weightage is set to increase to a maximum of 10 per cent in the GBIEM Global Diversified and 8.7 per cent in the GBIEM Global index. Currently, 23 Indian government bonds (IGBs) with a combined notional value of $330 billion are index eligible. GBIEM GD accounts for $213 billion of the estimated $236 billion benchmarked to the GBIEM family of indices. Only IGBs designated under the Fully Accessible Route are index eligible.

What is Emerging markets bond index (EMBI)?

• The emerging markets bond index (EMBI) tracks the performance of emerging market bonds and was first published by investment bank JP Morgan.
• Emerging market bonds are debt instruments issued by developing countries, which tend to carry higher yields than government or corporate bonds of developed countries.
• Emerging markets bond indexes are used as benchmarks for bond performance in emerging markets.
• Emerging market debt or bonds are considered sovereign debt. These government bonds are typically issued in foreign currencies, either in US dollars, euros, or Japanese yen.
• Because of the increased economic and political risk present in these countries, the credit rating on emerging market bonds tend to be lower than that on developed market bonds. Due to the perceived higher risk of investing in these assets. Alternately the sovereign bonds have higher yields for investors than that of more stable bonds in developed countries.
• The index is weighted on the basis of the market capitalization of government bonds, but it is the sub-index with the greatest liquidity requirements, so some markets are excluded.
• When one puts money in an index fund, that cash is then used to invest in all the companies that make up the particular index, which gives you a more diverse portfolio than if you were buying individual stocks.

Are there any other indices?

There are two other major indices: Bloomberg Global Aggregate Index  and FTSE EM index