In September 2023, India achieved a significant milestone by being included in the JPMorgan GBI-EM GD Index, one of the notable bond indices in the world.

But what is this index about? 

• This index includes government bonds from a diverse set of emerging market economies. 
• It serves as a benchmark for investors interested in emerging market debt. 
• The bonds are denominated in respective local currencies of the issuing countries. 
• In a nutshell, this index provides valuable insights into the performance of local currency government bonds in emerging markets, aiding investors in their decision-making process.

Some other notable bond indices (which list G-secs as well as corporate bonds and other securities) include Merrill Lynch Global Bond Index, Bloomberg Barclays Global Aggregate Bond Index, Citi World Broad Investment-Grade Bond Index (WorldBIG), Citi World Government Bond Index (WGBI), Bloomberg Barclays US Treasury Index, Barclays Inflation-Linked Euro Government Bond Index and so on.

Now, let’s delve into details of India’s inclusion in the JPMorgan GBI-EM GD Index:

Background of bond index inclusion

• India was the only major emerging country that was left out from the commonly-followed bond indices due to limitations put on foreign ownership of its domestic debt.
• Foreign ownership cap was 6% of the outstanding debt stock for government securities as per the government norms. This aimed at avoiding any foreign influence in domestic economic matters.
• However, India also needed infrastructure development to fuel the economic growth engine. At the same time,fiscal discipline was equally important.
• Thus, post covid, India had to broaden its investor base to accomplish these dual goals: fiscal discipline and infrastructure growth. That’s how – the ball was set rolling for India’s inclusion in the bond index.

Fully Accessible Route (FAR)

• The 6% quota had, as expected, acted as a major barrier to index inclusion in the past, but now the quotas were not ideal given the demands of the Indian economy.
• In April 2020, India introduced something known as “the Fully Accessible Route (FAR)”, which removed these quotas. In November 2023, RBI notified that Sovereign Green Bonds will also be available under FAR.
• This FAR route could now facilitate easier investment in specified Indian debt by non resident investors.

Bond index inclusion process

• JP Morgan, a well-known index provider, announced the inclusion of India government bonds in their flagship GBI-EM GD Index.
• The inclusion process had to be in several phases to ensure stable transition. It began in Q2 2024, with a gradual increase of 1% every month until it reaches the threshold of 10%.
• As expected, this move broadened India’s investor base which now included foreign money as well.

Benefits of inclusion

• For India:
  • Inclusion in global indices enhances India’s ability to fund its balance of payment deficit. (When foreigners invest in Indian G-sec, they bring in more dollars.)
  • India is currently in the hyper growth phase, so capital requirements, especially in the infrastructure sector are huge. Bond index inclusion allowed us to use foreign capital.

• For foreign investors:
  • The developed markets treasury rates are nowhere close to Indian markets. India’s local currency bonds thus offer an attractive risk-return profile.
  • In volatile times like today, diversification is the key for any investor. By adding India’s debt to their portfolios foreign investors now have a strong geographically diversified bet.

Post inclusion, the Indian CCIL bond index (broad index which includes 20 G-Sec bonds) is moving steadily upwards. Given that the inclusion will continue in a phased manner, the index is expected to continue its steady march for at least some more months.

Below is the Index movement since April last year.

Equity markets often receive a major spotlight when it comes to the financial world. However, bond markets are, in fact, vast and operate on a larger scale. The movements in bond markets are often followed closely by market stalwarts to get clues about the overall economy. 

With this inclusion, the Indian bond market will also mature further and act as a pillar for the Indian economy. It is a welcome step given current conditions. More about bond markets, sometime later! 

Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before making any investment decision.