The Indian Inclusion in JP Morgan GBI EM index

On September 2023, JP Morgan announced that it will include Indian government bonds to it’s emerging markets bond index. India will be included in the GBI-EM global diversified index starting June 28, 2024. Currently, 23 Indian government bonds with a combined notional value of $330 billion are eligible. Indian bonds will have a maximum weight of 10 per cent in this index.^[1] Inclusion of the bonds will be staggered over 10 months through March 31, 2025 (i.e., inclusion of 1 per cent weight per month).

After the much-anticipated announcement, estimates are being calculated on the possible implication for Indian economy especially the direct impact on government borrowings. A report by Goldman Sachs indicates that the index inclusion move could prompt passive inflows of around $30 billion (comprising emerging market local dedicated funds, as well as blended funds) over the scale-in period. Given India’s attractiveness from a yield and low volume perspective, it is guessed that another $10 billion of active flows may also come in.^[2]It would be in sharp contrast to the last decade when India received total bond inflows of around $40 billion, i.e. fewer than 2 per cent of the total issue size.^[3] The inclusion of India in the index signals a clear shift from the policies of yesteryears in line with stage of growth of economy. Indian economy is set to undergo changes at the macro level as it attempts to occupy the top 3 spot as envisioned by the Prime Minister. ^[4] The march of Indian economy towards achieving the spot of 5th largest economy had already transformed India.^[5] The Chairman and Chief Executive of JP Morgan put it aptly when he remarked that their operations in India “used to be just call centre but now it’s everything.^[6] The inclusion of India in GBI-EM index is a culmination of various policy decisions long in the making.

In the Budget for 2020-21, Finance Minister Nirmala Sitharaman had announced that "certain specified categories of Government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well." The Reserve Bank in consultation with the Government of India, introduced a separate channel, called the ‘Fully Accessible Route’ (FAR), to enable non-residents to invest in specified Government of India dated securities.^[7] Eligible investors were now able to invest in specified Government securities without being subject to any investment ceilings. The RBI essentially opened certain specified categories of government securities (G-Secs) for non-resident investors.

A DBS report in 2020 had concluded that unrestricted access of foreign investors to select Indian bonds is the “first step” towards facilitating of inclusion of INR Bonds in global bond benchmarks.^[8] It was also noted that "if inclusion into global indices is considered, this might translate into a potential weight of 4-6 per cent on the JPM GBI-EM Index and less than 1 per cent on the Bloomberg Global aggregate bond index."^[9]Morgan Stanley estimated that Indian inclusion in GBI-EM index may see investors pump $30 billion into India’s bond market within 10 months and between $170 billion to $250 billion over the next decade.^[10]After the announcement by JP Morgan this year, Morgan Stanley said it expected greater foreign participation in India's bond market would have a favourable impact on India's macro-economic indicators—a rise in balance of payments surplus, a reduction of external funding pressures on the currency, and an increase in liquidity.^[11]

HSBC responding after the Indian inclusion stated that it expects the move to bring in inflows to the tune of $30 billion.^[12]Apart from JPM index and Bloomberg Barclays EM Bond index, there are other notable bond indices like FTSE EM index.^[13]

Last year, there were expectations among analysts and investors that JP Morgan may move to add Indian rupee denominated bond in the index as the bonds had been on “positive watch” for a year. As per report, the bank had opened consultations in the middle of this year with fund managers handling about 85 per cent of the $240bn in assets that follow thebenchmark.^[14] It was held that operational issues prevented the move of addition to the index. Moreover, Indian government had always been wary of opening the country’s financial markets to foreign funds. In previous economic crisis, this cautious approach had even helped Indian economy tide away the calamity with relatively lesser volatility. The government’s reliance on domestic sources for borrowing had led to limited volatility due to external factors but higher borrowing costs compared to the other major economies of the world. As the fifth biggest economy, India’s ambition for third spot will require tapping into the potential of foreign investments.

Indian government has opened itself to alternate sources of funds by increasing the participation of foreign investors. It will ease the constraints around financing India’s twin deficits- fiscal and current account deficit. Apart from deepening the Indian bond market, it will increase liquidity and widen the ownership of G-secs. The lowering of yield curve for the government bonds will indirectly impact overall financing costs for the corporate sector too. The commercial banking sector will face less pressure to absorb a majority of government bonds. It will lead to enhanced performance of the banking sector. The current government had in words and deeds prioritized building of infrastructure. For example, India had about 145,000 kilometres of national highways at the close of the FY23 which was almost double the approximately 78,000 kilometres it had a decade earlier.^[15] About 100 big ticket projects of different ministries worth Rs. 5.89 lakhs crores have been recommended for approval under the PM Gati Shakti initiative in this fiscal.^[16] The purposefulness and speed of execution of projects is in stark contrast to the earlier situation when in 2014, India was clubbed into the group of fragile five nations along with Turkey, Brazil, South Africa and Indonesia. From just Rs. 26000 crores railway capex a decade ago, India is now at a staggering 2.4 lakh crores. High way capex too had jumped Rs. 17332 crores to 2.6 lakh crore and the number of airports have doubled.^[17]

Infrastructure has been the main story of this government. While India has built physical infrastructure to sustain growth in economy, it’s digital infrastructure where the statistics are staggering. In a report by the World Bank titled “G-20 Policy Recommendations for Advancing Financial Inclusion and Productivity Gains Through Digital Public Infrastructure (DPI)’ it was said that the impact of DPI goes beyond inclusive finance, to supporting health, education, and sustainability. In just six years, India has achieved a remarkable 80% financial inclusion rate—a feat that would have taken nearly five decades without a DPI approach.^[18]Infrastructure projects are not just important for development of the country but also improve quality of life.^[19]

In the Economic Survey, the Government noted that construction activity, in general, has significantly risen in FY23 as the much-enlarged capital budget (Capex) of the central government and its public sector enterprises is rapidly being deployed. A capex thrust in the last two budgets was not just aimed at addressing the infrastructure gaps in the country; it was part of a strategic package aimed at crowding-in private investment into an economic landscape broadened by the vacation of non-strategic PSEs (disinvestment) and idling public sector assets. The survey noted that “States, in aggregate, are also performing well with their Capex plans.” Central government’s capex has increased from 12% of total expenditure in 2017-18 to 22% in 2023-24.^[20] Given that multiplier estimated for the country is increase of economic output by four times the amount of capex, the government focus on capex will deliver high-returns for the country.^[21] The IMF has described India as a 'bright spot' amid tepid global growth, whereas, the World Bank has acknowledged its resilience amid the current global headwinds.

From the point of view of foreign investors, India is a fresh alternative to include in their portfolio after the economic slowdown in China and Russia being removed from the indices after Ukraine conflict.^[22] India’s economy has outperformed many of its emerging market peers and the Nifty 50 benchmark hit an all-time high this year.^[23] The move of JP Morgan is also expected to encourage credit rating agencies like S&P, Fitch and Moody’s to lift their assessment of India. Currently, all three give India their lowest investment grade rating.^[24] The opinion of Credit rating agencies on India stands in sharp contrast to the confidence displayed by the investor community. About three-quarters of the benchmark investors who were surveyed were overwhelmingly in favour of India’s inclusion in Index.^[25]

The inclusion in index is apt time India shed its inhibitions and aim at growing the domestic economy to improve the standard of living of its people. The Indian growth story despite the many hurdles is still going strong. The IMF expects India to be the third biggest economy -2 years earlier than expected. India is set to overtake Germany and Japan by 2027 as per the International Monetary Fund's World Economic Outlook database.^[26] A confident India which isn’t cynical of volatile foreign investments but can tap into it for funding its growth story is the need of the hour.

Endnotes

^[1] https://indianexpress.com/article/business/economy/jp-morgan-india-emerging-markets-bond-index-8951000/lite/ [3]
^[2] https://indianexpress.com/article/business/economy/jp-morgan-india-emerging-markets-bond-index-8951000/lite/ [3]
^[3] https://indianexpress.com/article/opinion/columns/with-entry-into-jp-morgan-bond-indices-india-is-playing-in-the-world-8952053/ [4]
^[4] https://timesofindia.indiatimes.com/india/pm-modi-ki-guarantee-making-india-among-top-3-global-economies/articleshow/103983985.cms?from=mdr [5]
^[5] https://www.cnbctv18.com/world/india-is-fifth-largest-economy-will-be-third-largest-soon-says-pm-modi-at-us-congress-17016601.htm [6]
^[6] https://www.businesstoday.in/latest/economy/story/used-to-be-just-call-centres-jpmorgan-chairman-jamie-dimon-shares-banks-growth-story-in-india-399688-2023-09-26 [7]
^[7] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11849&Mode=0#AN1 [8]
^[8] https://economictimes.indiatimes.com/markets/bonds/new-foreign-investment-category-first-step-towards-inclusion-of-rupee-bonds-in-global-benchmarks-dbs/articleshow/74912394.cms?from=mdr [9]
^[9] https://economictimes.indiatimes.com/markets/bonds/new-foreign-investment-category-first-step-towards-inclusion-of-rupee-bonds-in-global-benchmarks-dbs/articleshow/74912394.cms?from=mdr [9]
^[10] https://www.reuters.com/markets/asia/exclusive-indias-inclusion-into-key-govt-bond-index-pushed-back-next-year-2022-09-27/ [10]
^[11] https://www.bqprime.com/business/fitch-says-indias-inclusion-in-bond-index-to-have-marginal-impact-in-near-term [11]
^[12] https://www.cnbctv18.com/market/jpmorgan-to-add-indian-bonds-to-its-emerging-markets-index-from-june-2024-17857081.htm [12]
^[13] https://indianexpress.com/article/opinion/columns/with-entry-into-jp-morgan-bond-indices-india-is-playing-in-the-world-8952053/ [4]
^[14] https://www.ft.com/content/fe962737-971d-4f75-8d43-0e35d026d0af [13]
^[15] https://www.livemint.com/economy/interview-domestic-demand-higher-capex-behind-indian-economys-resilience-post-covid-cfa-institutes-s-ramachandran-11695725508208.html [14]
^[16] https://www.business-standard.com/india-news/pm-gati-shakti-infra-projects-worth-rs-5-89-trn-recommended-for-approval-123082801090_1.html [15]
^[17] https://www.fortuneindia.com/long-reads/modi-govt-9-the-big-bets/113010 [16]
^[18] https://www.deccanherald.com/business/economy/india-has-used-digital-public-infrastructure-to-achieve-80-financial-inclusion-in-6-years-world-bank-2678859 [17]
^[19] https://indianexpress.com/article/opinion/columns/with-entry-into-jp-morgan-bond-indices-india-is-playing-in-the-world-8952053/ [4]
^[20] https://www.livemint.com/economy/interview-domestic-demand-higher-capex-behind-indian-economys-resilience-post-covid-cfa-institutes-s-ramachandran-11695725508208.html [14]
^[21] https://pib.gov.in/PressReleasePage.aspx?PRID=1894932 [18]
^[22] https://www.ft.com/content/e9ecf087-cac7-439a-9f42-c9d97c8c7e90 [19]
^[23] https://www.ft.com/content/e9ecf087-cac7-439a-9f42-c9d97c8c7e90 [19]
^[24] https://www.ft.com/content/e9ecf087-cac7-439a-9f42-c9d97c8c7e90 [19]
^[25] https://www.cnbctv18.com/market/jpmorgan-to-add-indian-bonds-to-its-emerging-markets-index-from-june-2024-17857081.htm [12]
^[26] https://www.livemint.com/economy/india-may-become-third-biggest-economy-after-us-china-in-5-yrs-imf-report-11665922228321.html [20]

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