JPMorgan Chase & Co has set a significant milestone by becoming the first global index provider to include India’s $1 trillion government bond market in its emerging markets index. This momentous decision is expected to usher in billions of dollars in investments into India’s bond market. While this is a promising development for India’s global recognition, it also exposes the country’s public finances to increased scrutiny from foreign investors, potentially leading to heightened market volatility.
JPMorgan’s move reinforces India’s ambition for greater global influence, given its impressive economic growth rate, positioning itself as a compelling alternative to China. India’s $1 trillion government bond market has grappled with the perception of being insular for years. However, this perception is set to change following JPMorgan Chase & Co’s decision to include it in its emerging markets index. This move paves the way for substantial inflows at a time when the bond market is grappling with record government borrowings.
Morgan Stanley strategists, led by Min Dai, expressed their views in a note, describing the index inclusion as a “milestone event” and suggesting that it could trigger foreign investments in India’s fixed-income market. The inclusion in the index aligns with India’s aspirations for greater global prominence, as it boasts one of the world’s fastest-growing economies and positions itself as a viable alternative to China. However, it is essential to recognize that this inclusion will subject India’s public finances to more extensive scrutiny by foreign investors, potentially increasing market volatility.
The inclusion process will commence in phases starting from June 2024. India’s weighting in JPMorgan’s key emerging market index, which currently has $213 billion benchmarked to it, will reach a maximum of 10%. Goldman Sachs Group Inc anticipates inflows of more than $40 billion from active and passive funds over the next 18 months. The strategists, led by Danny Suwanapruti, predict that these purchases will be “front-loaded,” beginning immediately as investors prepare for inclusion. Currently, foreign investors hold less than 2% of government securities. Historically, authorities have expressed concerns about the consequences of substantial debt inflows, with local banks and mutual funds being the primary bond buyers.
Madhavi Arora, lead economist at Emkay Global Financial Services Ltd, suggests that the index inclusion “should structurally augur well for rates and forex markets, leading to a lower cost of borrowings for the economy and more accountable fiscal policy-making.” Kotak Mahindra Bank anticipates that foreign ownership will rise to 3.5%-4% by the end of fiscal 2025, as investors are drawn to a high-yielding market. Jayesh Mehta, India country treasurer at Bank of America in Mumbai, indicates that benchmark 10-year yields could decline to 6.9%-6.95% over the next six to eight months if the global economic environment improves. They closed at 7.19% on Friday.
It’s important to note that Bloomberg LP is the parent company of Bloomberg Index Services Ltd, which administers indexes that compete with those from other service providers. This development marks a significant turning point for India’s bond market, positioning it on the global stage and inviting substantial foreign investment. While it opens up new opportunities, it also underscores the need for careful fiscal management and risk assessment in the face of increased foreign scrutiny and potential market fluctuations.
