In September 2023, JP Morgan made the much-awaited announcement of India's inclusion in the Government Bond Index (GBI). India was on the positive watchlist for the last two years for inclusion in the index. The markets reacted positively to the announcement, with the yield on Indian sovereign bonds falling and the Indian Rupee appreciating against the US Dollar.
Let us understand the details of India's inclusion in the bond index and its positive impact on the Indian economy.
India’s inclusion in the bond index
Indian sovereign bonds will be included in the Government Bond – Emerging Market Index (GBI-EM). It is one of the most frequently followed indices in the emerging markets' local currency-denominated government bond space. The GBI-EM has three versions, and India will be a part of the GBI-EM Global Diversified Index (GBI-EM GD).
India will have a maximum weight of 10% in the GBI-EM GD. The inclusion will start from 28th June 2024 with a weightage of 1%. The weightage will increase by 1% per month for the next ten months till it reaches the maximum weight of 10% by 31st March 2025. JP Morgan mentioned that currently, 23 Indian Government Bonds with a combined value of US $330 billion are eligible for inclusion in the index.
Benefits of inclusion in the JP Morgan global bond index
As per experts, India's inclusion in the GBI-EM index is expected to attract US $25-30 billion inflows. It will have a positive impact on India's macros. The forex inflows will add to India's forex reserves. It will be positive for India's current account deficit (CAD). The yield on Government bonds will fall, reducing the cost of borrowing for the Government.
The borrowing cost for corporates is benchmarked to interest rates on Government securities. Thus, corporations will also benefit from lower borrowing costs. The forex inflows will support the India Rupee versus the US Dollar. A stronger Rupee will reduce the costs of imports and thus help in lowering imported inflation.
Currently, FPI flows in the Indian bond market are low. India’s inclusion in a widely followed global bond index will attract healthy long-term capital flows in the Indian bond market. It will help deepen India’s debt market.
Importance of India’s inclusion
The GBI-EM index has a significant weight on China and Russia. However, the Chinese economy is struggling. Russia has been excluded after it invaded Ukraine. On the other hand, India's macros have been improving over the last few years, and India is one of the fastest-growing economies in the world. Hence, this is a good time to include India in the GBI-EM index. A majority of 73% of global asset managers who participated in the consultation process supported the decision to include India in the GBI-EM.
Potential for inclusion in other global bond indices
JP Morgan GBI-EM is one of the three widely tracked global bond indices. Bloomberg (Bloomberg Global Aggregate Index) and FTSE Russell (FTSE Emerging Markets Government Bond Index) are the other two major providers of global bond indices. The Government is working with them to get Indian Government bonds included in their global bond indices. Whenever that happens, it will attract more capital flows into the Indian debt market.
After two years of being on the watch list, India will finally get included in the first global bond index. It will boost forex reserves, lower borrowing costs for the Government and corporates, support the India Rupee, and thus benefit the Indian economy overall. It also opens the doors for India's inclusion in other global bond indices. We hope that happens sooner rather than later.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.