India set for record inflows, enters JP Morgan Bond index

In a defining development for domestic fixed-income markets, India’s government bonds are now part of JPMorgan Chase & Co’s emerging markets bond index from June 28. 

This follows an announcement made in 2023 September, paving the way for substantial inflows of foreign capital into the Indian economy.

Indian Government Bonds (IGBs) will be included in the widely followed JPMorgan Government Bond Index-Emerging Markets (GBI-EM) starting with a 1% weight, which will gradually increase to 10% over the next 10 months. 

IGBs issued by the Reserve Bank of India (RBI) under the Fully Accessible Route (FAR) will be included in the global indices. According to JPMorgan, the average maturity of the Indian bonds included is seven years, with a yield-to-maturity (YTM) of 7.09%. The bonds with the highest weightage in the index (over 0.5%) include 7.18 GS 2033, 7.30 GS 2053, and 7.18 GS 2037.

Boost for global inflows

India becomes the 25th market to be included in the index since its launch in June 2005. This inclusion is anticipated to result in global flows worth $20 billion to $25 billion into the Indian bond market. Since the announcement, India’s index-eligible bonds have already attracted $10 billion.

Morgan Stanley said that investors tracking the index have already positioned for India’s inclusion, with 3.6% of their assets allocated to the nation’s sovereign debt as of the end of May, according to a Bloomberg report.

“The index inclusion is said to attract nearly $25-30 bn flows in the ongoing financial year, though we feel the positive sentiment on back of this seems to be already priced in at current levels, and hence believe we should be range bound in the near term going into the Budget, despite the actual start of inclusion at the month end,” analysts at Nuvama Institutional Equities said.

India’s inclusion is expected to increase Asia’s weight to 47.6% in the index, HSBC Plc said in a note.

India's inclusion in the JPMorgan GBI-EM index is anticipated to increase Asia’s weight in the index to 47.6%, according to a note from HSBC Plc. This inclusion will result in the Europe, Middle East, and Africa (EMEA) region experiencing the most significant reduction in index weight. The aggregate weight of EMEA emerging markets is expected to drop to 26.2% by March, when India's inclusion is complete, down from approximately 32% at the beginning of this month.

The heavy flows associated with the index inclusion are likely to boost demand for Indian government securities in FY25. While this development is favorable for maintaining lower yields, it could also lead to some bouts of volatility, analysts noted.

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