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The decision to include Indian government bonds in two prominent global indices recently is seen as a shot in the arm for the fast-growing country and is expected to bring billions in inflows.
India’s bonds will be added to the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) in June, the Wall Street lender announced in September.
JPMorgan’s inclusion is reportedly India’s first accession in history in a global bond index.
Earlier this month, Bloomberg Index Services followed suit, announcing that it would add Indian government bonds to its Emerging Markets Local Government Index from 31 January 2025.
Such inclusions, analysts noted, could lead to billions of dollars of inflows into India’s rupee-denominated government debt. As demand rises, bond yields fall, supporting the local currency.
Deepak Agrawal, head of debt investments at Kotak Mutual Fund, told CNBC that he expects the inclusions to generate “steady flows of around $25 [billion] to $30 billion” over the next 12 to 18 months after the rebalancing period beginning in June 2024.
“Overall, we see this as a move in the right direction,” Agrawal added.
Goldman Sachs said it expects India’s bond markets to see inflows of “over $40 billion from the time of the announcement to the end of the escalation period, or about $2 billion per month.”
JPMorgan said the inclusion of Indian bonds will be phased in over 10 months, starting at 1% in June to a maximum weight of 10% in its index in April next year.
Big blow to growth
JPMorgan’s inclusion of Indian bonds hailed as a ‘landmark event’ by Invest in Indiathe government’s national investment promotion agency.
“The inclusion will help India realize its goal of a $5 trillion economy by 2030,” the agency said, adding that it would help Asia’s third-largest economy integrate into the global economy.
It will also help India raise more capital, meet rising borrowing costs and increase the investor base for government securities.
“As a consequence of this stable long-term global investment, Indian banks, the largest investors in government securities, will be able to lend more domestically, leading to infrastructure and job creation,” Invest India said.
India’s government bond market was valued at $1.2 trillion in October and is largely dominated by domestic institutional investors, according to Invest India.
Does this make investing in India easier?
“Including the index alone does not make an investment [in India] easier,” Kenneth Akintewe, head of Asian sovereign debt at investment firm Abrdn, told CNBC.
However, Akintewe said the addition of Indian bonds to global indices encourages a much wider set of investors to invest in the country, “which frankly they should have done anyway given how strongly the market is performing”.
“However, the reforms that led to the inclusion of indices, i.e. the introduction of the fully accessible route (FAR) component of the government bond market, with FARs rising as a percentage of the market and being index eligible, makes investing easier. .”
In accordance with fully accessible routeeligible investors can put money into specific government securities without caps, paving the way for foreign investors to access Indian bond markets.
Akintewe predicted that additions to such indices could bring about a “passive flow of $30 billion”.
The inclusion of the JP Morgan bond index could facilitate about $24 billion in passive inflows between June 2024 and March 2025. Fitch Ratings he said in a September note. “Flows could be larger if other indices also move to include Indian government securities,” the note added.
“This could serve to slightly reduce funding costs and support further growth in domestic capital markets, but the immediate positive effects on India’s credit profile will be limited in the short term,” the rating agency said.
Bonds versus stocks
Monthly inflows into India’s domestic equity mutual funds rose to a 23-month high of $3.2 billion in February, data from Association of Mutual Funds in India, Goldman Sachs said. India also saw foreign inflows of $2.2 billion in the week ended March 15, according to the investment bank.
DBS senior economist Radhika Rao said local currency government bonds are also poised to profit from strong foreign inflows.
The biggest buyers of India’s government debt have so far been institutional investors such as banks, mutual funds and insurance companies – but the inclusion of Indian government bonds in global indices means the country will now be able to expand its fundraising avenues.
“It diversifies India’s funding sources, relieves the pressure on domestic investors to absorb supply, lowers funding costs, strengthens the fiscal position, eliminates the need to issue US dollar government debt and encourages further capital market development,” said Akintewe of Abrdn. .
— CNBC’s Clement Tan contributed to this story.