JPMorgan Chase & Co. will be adding India to it’s emerging markets bond index in June 2024. A move that will see huge inflows in the Indian bond market.
A quick look at what this means.
What are Global bonds?
Bonds are units of debt issued by Governments or corporations and Global bonds are basically those bonds that are issued and traded outside the country which has issued the bonds.
For example: The Indian Govt. bonds can either be issued in Rupee or the currency of the country where the bond is issued, like Yen if issued in Japan or Dollars if issued in the US.
What are global bond indices?
These are the indices that track the above-mentioned global bonds. Some of the most notable bond indices are; MSCI, JP Morgan GBI-EM Global Diversified Index, Bloomberg–Barclay’s, FTSE WGBI Index are the most notable ones.
Why was India not included in the past?
Mainly due to taxation and settlement mechanism-related issues.
How much weightage will India have in these indices?
India is expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD). It is worth noting that, Inclusion in one index may lead to us getting added to other indices.
Which Indian bonds are eligible?
Currently, 23 Indian Government Bonds (IGBs) with a combined notional value of US$ 330 billion are index eligible, with a cap of 10%, this should translate to flows of US$ 20-30 billion.
When will the inclusion start?
Inclusion of the IGBs will be staggered over a 10-month period starting June 28, 2024, through March 31, 2025 (i.e., inclusion of 1% weight per month).
What are the benefits of this inclusion?
This move shall attract stable FII flows to the tune of 20-30 billion dollars into our debt markets, capping the upside on the bond yields by taking care of the supply-side constraints. To put things in perspective, We’ve received 3.5 billion dollars in foreign inflows in 2023.
Other benefits include easing pressure on banks and DIIs to absorb all borrowings and may help in more flows towards the corporate debt market.
This should eventually help the rupee as well as capital inflows will offset the impact of any global headwinds like higher crude oil prices.
This is a developing and interesting topic that is not that easy to understand. Do share your views and also share if you find anything relevant to this topic so that we all can learn more about it.
Conceptually this is very similar to a stock getting added in Nifty50.
As soon as stock is added (with a weight of say 2%) all the funds which track this index will have to invest 2% of their corpus in that stock. This results in inflow in stock resulting in its price rising.
Something similar is happening here.
JP morgan has very popular bond index for emerging countries. It has bonds from around 8-9 countries and funds with billion of dollar invest using that index as base.
Now JP morgan is adding India Sovereign bonds to that index, with weight of around 10%.
So all funds who were tracking this index will have to invest 10% of their corpus in India sovereign bonds (over 1 year time). Total corpus being invested through this index in range of 200-300 billion so expected that india will receive 20-30 billion.
Foreign funds will have to bring in dollar, buy INR and use that INR to buy Gsecs from market / RBI auction (hence rupee is also strengthens in anticipation of USD flow)
As more investors are vying for Gsec, interest rate on it will not increase, thus capping the upside of yields.
Hope this helps.
Thank you Meher for starting this topic-thread,
and akash for explaining some of the aspects that i was finding confusing.
To get a more elaborate perspective, Q1. What’s the USD forex outflow from India in 2023 ? Q2. How about these inflows/outflows for the past 4-5 years?
If we have the answers to the above 2 Qs
and we know the historical USD - INR exchange-rates, can we speculate with somewhat high-confidence
the expected USD-INR exchange rate in 2024 and 2025? (of course, of course, other geo-political updates can further impact the USD-INR rate, no doubt)
If yes, Q3. What would be the expected USD-INR exchange rate in a year or two? (and why?)
Q4. What would be the various financial instruments that we could use
to generate significant returns (how much?) in a year or two from now,
by speculating on the above INR appreciation w.r.t USD by 2024/2025?
