Starting June 28, 2024, Indian bonds will be included in the JP Morgan Government Bond Index – Emerging Market (GBI-EM). This announcement, made in September 2023, marks a significant milestone for India, as it is the first time Indian bonds will be part of this global index. This move is expected to deepen the Indian bond market.
The journey to this inclusion began in 2013 when the Indian government started discussing the possibility. It has taken ten years of effort and negotiation to reach this stage. JP Morgan has stated that the index will gradually include Indian bonds, starting with a 1 percent weight in June 2024 and increasing by 1 percent each month until it reaches a maximum of 10 percent by March 31, 2025.
The nation has ambitious goals to transform its economy, which requires massive investments in infrastructure, connectivity, and raising income levels across all sections of society. While the government raises funds through taxes, this approach has limitations.
Since, excessive taxation can harm the economy, therefore, government borrowing through bonds provides an alternative way to raise the necessary funds.
Bonds or fixed-income instruments are essential for asset allocation along with equities. By deepening the bond market, the government can diversify its borrowing sources, reduce costs and risks, and avoid crowding out private investments from the limited domestic capital. The inclusion in the JP Morgan index opens up the Indian bond market to more foreign investors. According to JP Morgan, foreign holdings of Indian bonds are expected to nearly double from 2.5 percent to 4.4 percent over the next year.
The announcement of inclusion has already sparked increased interest from overseas investors, with over $10 billion flowing into Indian sovereign bonds. Goldman Sachs predicts that as much as $40 billion could eventually be invested.
According to a Bloomberg from June 19, 2024, Indian government bonds have delivered a 4.5 percent return this year, second only to Argentina in emerging market bonds. JP Morgan’s press note details that the average maturity of the Indian bonds included is around seven years, with a yield to maturity of 7.09 percent.
A total of 27 bonds will be included in the index, the 7.18 percent benchmark 10-year government bond maturing in August 2033 will have the highest weight of 0.59 percent. Two other significant bonds include a 40-year bond maturing in June 2053 and a 13-year bond maturing in July 2037, both with weights above 0.5 percent.
These bonds are very liquid and in high demand, for instance, 40-year bonds are popular among life insurance companies that need to match their assets and liabilities. Including these bonds in the index will add further depth to the market.
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One risk of foreign capital flows is that it can leave the country during crises, making it vulnerable. However, this risk is currently mitigated due to India’s robust foreign exchange reserves, the relatively low proportion of foreign capital in the bond market, and India’s attractive growth rate. These factors help in attracting diversified sources of capital, reducing the risk of sudden outflows.
Currently, bond yields are attractive, making it a good time for investors to build a bond portfolio. Increased foreign investment will likely put downward pressure on interest rates, countering the upward pressures from growth and other factors like high US interest rates and oil prices.
The inclusion of Indian bonds in the JP Morgan Government Bond Index – Emerging Market later this month is set to add much-needed depth to the Indian bond market. This could mark the beginning of larger capital inflows into the debt market, making it an exciting time for the Indian bond market.
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