Impact of JP Morgan in inclusion of Indian bonds in its Global Government Bond Index Emerging Markets
JP Morgan's decision to add Indian government bonds to its Government Bond Index-Emerging Markets (GBI-EM) from June 28, 2024, is a significant step for India's financial markets, indicating its increasing connection to the global economy. This addition is expected to attract significant foreign investment into India’s bond market, as the country is projected to reach a maximum weightage of 10% in the $213 billion. Global Diversified Index by March 31, 2025. With estimates from agencies such as HSBC and Goldman Sachs indicating that inflows could potentially reach $30 billion.
Rising foreign investment and expansion of market depth
This marks a substantial increase in foreign capital entering the IGB market, which is currently valued at $1.2 trillion. 23 IGBs, totalling $330 billion in notional value, is considered to be included in the index to improve liquidity and strengthen the market. Traditionally, the percentage of foreign ownership of Indian government bonds has been below 2%, making it one of the lowest compared to other emerging markets. This initiative aims to expand the investor pool.
Decrease in Interest Rates
The anticipated influx of $23 billion to $30 billion resulting from this addition is expected to cause a de crease in bond yields, subsequently lowering the borrowing expenses for the Indian government. The de crease in borrowing expenses is crucial for funding the government's fiscal shortfall, which has been high since the onset of the COVID-19 pandemic, and for backing its infrastructure investment strategies. Re diced interest rates will support the government's infrastructure projects, which are essential for creating jobs and fostering long-term economic expansion.
Backing India's economic aspirations
Being included in the GBI-EM index supports India's goal of achieving a $5 trillion economy by 2030. The investment indicates increasing trust from the global investor community in India's economic policies and market fundamentals, while also promoting a more interconnected economy with the global financial system. Furthermore, the rise in foreign investment can have a beneficial effect on India's balance of pay mints and help bolster the Rupee, thus contributing to India's economic stability and expansion.
Perils and Obstacles
Yet, this increased connection with the global financial markets makes India's bond market vulnerable to external economic changes, policy adjustments in major economies, and geopolitical risks. These factors may cause volatility, necessitating meticulous management and strategic policy actions by Central Bank. The Reserve Bank of India (RBI) has collaborated with international index providers and determined that the advantages of index incorporation outweigh the associated risks, highlighting the significance of this inclusion despite possible obstacles.
Conclusion
India being added to JP Morgan's GBI-EM index is a significant advancement for its bond market and overall economy, showcasing its increasing global influence and the sophistication of its financial markets. This addition is anticipated to stimulate substantial beneficial transformations, such as increased liquidity, decreased borrowing expenses, and a broader range of investors, all of which are crucial for India's enduring economic goals. However, it requires careful oversight from policymakers and regulators to reduce risks and ensure that the integration results in sustainable growth and stability.