What does India's inclusion in the JP Morgan EM Bond Index mean for the markets, and much more
JP Morgan's announcement on including India in its Emerging Markets (EM) Bond Index has evoked a lot of speculation and interest among the investor and economists community. This move is seen as a sign of the coming age for India and carries huge ramifications in the world financial market. Let us delve deeper into why this recent inclusion has come about, what changes can be expected in the market, and what the broader implications are for the Indian
The Inclusion
India is to be included in the JP Morgan EM Bond Index from June 2024. This inclusion indicates that India is scaling up its importance in the global financial space. This decision has been taken post several rounds of extensive consultations with and considerations by JP Morgan, acknowledging India's economic stability, market size, and potential growth. The 23 Indian Government Bonds in the JP Morgan Emerging Market Bond Index are selected based on the Fully Accessible Route (FAR) eligible securities with a minimum outstanding above $1 billion and at least 2.5 years residual maturity as of the inclusion start date of June 28, 2024.
Market Impact
a. Increased Investment Inflows
The most immediate impact of this inclusion is the flow of money that India will witness. As India becomes part of the EM Bond Index, it will attract a sizeable amount of passive investment from funds that track this index. After all, with 1% additions to its weightage every month beginning June next year, the Indian bonds will now hold a weight of 10% in its index. Analysts believe the inflow could be to the tune of close to $24 billion over these 10 months.
An inflow of such magnitude is expected to be a source of resilience for the country's financial markets and provide additional resources for economic growth.
b. More Affordable Borrowing
Moreover, making a statement regarding government borrowing, the Indian government has decided on huge market borrowing to support the country's fiscal deficit. The government borrowing plan is decided to be at Rs. 6.5 trillion for the remainder of the fiscal year 2023-24. If demand persists for Indian bonds, then yields on these bonds will only go further down, which also means reduced borrowing costs for the Indian government directly. The fiscal pressure will fall, and more public investments can be made in infrastructure, health, education, and other important sectors needed for the proper performance of the economy.
c. Currency Stabilization
As of June 2024, the foreign exchange reserves held by India stand approximately at $595 billion. The inflow of foreign capital is likely to stabilize the Indian rupee. A stable and possibly appreciating currency increases the confidence of investors further to enhance foreign direct investments into the country. This will have inflation under control due to a strong rupee, leading to a decrease in the cost of imports and hence keeping it within the target range.
d. Better Global Position
India's bond market will now find increased interest from a diversified group of investors. It is seen that in the history of Indian bonds, the proportion invested by domestic investors dominates. Entry to the JP Morgan EM Bond Index can attract various institutional investors and sovereign wealth funds globally. This will also increase the liquidity and stability in the market.
e. Diversification of Investor Base
India's bond market will benefit from a more diversified investor base. Historically, the majority of investments in Indian bonds have come from domestic investors. The inclusion in the JP Morgan EM Bond Index will attract a broader spectrum of international investors, including institutional investors and sovereign wealth funds. This diversification can enhance market liquidity and stability.
Conclusion
The inclusion of India in the JP Morgan EM Bond Index shall be a further lift to its financial market and economy. India however needs to continue with economic reforms and sustain a stable macroeconomic environment so that these opportunities actually are reaped. It is really the performance of India in the coming years that will determine those long-term gains from this inclusion.