India officially joined JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) on Friday (28 June 2024). This development, following a September announcement, may lead to significant financial inflows into the world’s fifth-largest economy.
From today, Indian Government Bonds (IGBs) will gradually be integrated into the index, beginning with a 1% allocation. This allocation will increase monthly, reaching a maximum of 10% by March 31, 2025. This puts India in the company of China, Indonesia, and Mexico, each with a 10 percent cap in the JP Morgan Global Bond Index – Emerging Market Global Diversified Index.
Foreign investors have already invested around $10 billion in Indian securities that qualify for inclusion in the index.
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Goldman Sachs predicts there will be an additional $30 billion in investments as India’s representation in the index increases to 10 percent. This consistent inflow of funds is expected to maintain or increase the value of Indian government bonds.
What is the JP Morgan Emerging Market Index?
The JP Morgan Emerging Market Bond Index (EMBI), established in the early 1990s, is the leading benchmark for emerging market bonds worldwide.
It started with the issuance of the first Brady bond and has grown to include the Government Bond Index-Emerging Markets (GBI-EM) and the Corporate Emerging Markets Bond Index (CEMBI).
These indices are now key benchmarks for local market and corporate emerging market bonds. Additionally, region-specific indices like the JP Morgan Asia Credit Index (JACI), the Russia Bond Index (RUBI), and the Latin America Eurobond Index (LEI) offer more targeted coverage.
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What is the significance of JP Morgan’s index?
The JP Morgan Emerging Market Global Diversified Index oversees about $213 billion in assets worldwide. With India’s 10 percent weight in the index, it is projected to draw $21 billion (Rs 1.7 trillion) in investments by March 31, 2025, assuming investors previously had no exposure to Indian bonds.
This inclusion might encourage other emerging market index providers, such as Bloomberg and FTSE, to add India as well, potentially leading to even more investment inflows into the Indian economy.
Eligible Indian Government Bond
Only Indian Government Bonds (IGBs) issued under the Reserve Bank of India’s ‘Fully Accessible Route (FAR)’ qualify for inclusion in the indices.
These bonds must have a minimum outstanding amount exceeding $1 billion and at least 2.5 years of residual maturity, making all FAR-designated IGBs maturing after December 31, 2026, eligible.
Impact of India’s Inclusion on Financial Flows
India’s inclusion in the JP Morgan Emerging Market Global Diversified Index is expected to generate $23.6 billion in inflows into Fully Accessible Route (FAR) bonds. Foreign Portfolio Investor (FPI) holdings of these bonds could rise to 3.4 percent by April/May 2025.
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Effects of India’s Inclusion on Other Emerging Markets
The inclusion of Indian government bonds will likely decrease the weights of Thailand, Poland, and the Czech Republic in the JP Morgan Emerging Market Bond Index over the next 10 months.
Since the announcement on September 21, 2023, Indian government bonds have attracted $10.4 billion in inflows, compared to just $2.4 billion in the first eight months of 2023 and annual foreign outflows of around $1 billion in 2021 and 2022.
India’s entry into JP Morgan’s GBI-EM is a significant milestone for the country’s financial markets, promising increased investment and potentially greater stability for Indian government bonds.
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