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Explained: India inclusion in JP Morgan EM Bond index, market impact & more

India inclusion in JP Morgan Bond Index: The inclusion process will begin on June 28, 2024 and will be completed over a period of 10 months, till March 2025

JPMorgan, JP Morgan bank india

The JP Morgan Emerging Market Bond Index (EMBI) was formed in the early 1990s

Nikita Vashisht New Delhi
India JP Morgan bond index inclusion: On June 28, 2024, Indian Government Bonds (IGBs) will begin the process to be included in the JPMorgan - Emerging Market (EM) Bond Index.

The inclusion process, however, will be completed over a period of 10 months, till March 2025.

The process of including Indian Government Bonds (IGBs) will start with a one-per cent weight on June 28, 2024, and will increase by one percentage point each month to reach 10-per cent cap by March 31, 2025.

With this, India will join China, Indonesia, and Mexico to have the highest cap of 10 per cent in the JP Morgan Global Bond Index - Emerging Market Global Diversified Index.

Foreigners have already plowed roughly $10 billion into the securities eligible to join JPMorgan’s index on June 28, and Goldman Sachs Group Inc. sees at least $30 billion more of flows in coming months as India’s weighting on the index steadily rises to 10 per cent. That’s likely to keep bond prices buoyant. READ MORE

Ahead of IGBs inclusion in the JP Morgan Emerging Market index on June 28, 2024, here is all you need to know:

What is a bond market index?
A bond index is used to measure the value of a section of the bond market. According to IHS Markit, it can be defined by specific characteristics such as maturity or credit rating to capture a narrower slice of the market.

Just like an equity index, a bond index is made up from the prices of selected bonds, which are a lot more fluid and often harder to value than equities.

What are the key global bond market indices?
There are various bond indices like the Bloomberg Aggregate Bond Index, the Merrill Lynch Domestic Master, JP Morgan Bond Index, FTSE Bond Index, and the Citigroup US Broad Investment-Grade Bond Index that track and measure corporate bond portfolio performance.

What is the JP Morgan bond index?
JP Morgan's site defines JP Morgan Global Aggregate Bond Index or JPM GABI as a US dollar denominated, investment-grade index spanning asset classes from developed to emerging markets.

The JPM GABI extends the US index to also include multi-currency, investment-grade instruments.

The JPM GABI is constructed from over 5,500 instruments issued from over 60 countries and denominated in over 25 currencies, collectively representing $20 trillion in market value.

What is the JPMorgan Emerging Market Index?
The JP Morgan Emerging Market Bond Index (EMBI) was formed in the early 1990s after the issuance of the first Brady bond.

More recently, JP Morgan led investors towards higher yielding local rates by launching the Government Bond Index-Emerging Markets (GBI-EM) series and the Corporate Emerging Markets Bond Index (CEMBI) series. These have become the new standard for local market and corporate EM benchmarks, respectively.

This index has three sub-variants: JP Morgan Emerging Markets Bond Index Plus, the JP Morgan Emerging Markets Bond Index Global, and the JP Morgan Emerging Markets Bond Global Diversified Index.

The Emerging Markets Bond Index Plus (EMBI+) tracks total returns for traded external debt instruments in the emerging market.

The JP Morgan Emerging Markets Bond Index Global tracks total returns for traded external debt instruments in the emerging markets, and is an expanded version of the JPMorgan EMBI+.

Why is the JP Morgan Emerging Market Index important?
JP Morgan Emerging Market Global Diversified Index has assets under management of about $213 billion by global investors.

A 10 per cent weight for Indian Government Bonds in the JP Morgan EM Bond Index should lead to inflows worth $21 billion (Rs 1.7 trillion) worth of investments by March 31, 2025, assuming investors have zero weight as of now.

Furthermore, if the index inclusion by JP Morgan nudges other EM index providers like Bloomberg, FTSE, etc to include India in their EM Bond indices, it will result in additional inflows in the economy.

Which Indian Govt Bonds are eligible to be included in the JP Morgan EM Bond index?
Only Indian Govt Bonds (IGBs) issued by the Reserve Bank of India (RBI) under the 'Fully Accessible Route (FAR)' will be included in the indices.

These IGBs should have a minimum outstanding amount above $1 billion equivalent and have at least 2.5 years of residual maturity. Thus, all FAR-designated IGBs maturing after December 31, 2026 will be eligible.

What are FAR bonds?
In April 2020, the Reserve Bank of India introduced a list of securities that were exempt from any foreign investment restrictions under a 'fully accessible route' (FAR), making them eligible for inclusion in global indexes.

JP Morgan identified 23 Indian government bonds with a combined notional value of $330 billion eligible for inclusion.

How will India's inclusion in the JPMorgan Emerging Market Index impact bond markets?
Banks, insurance companies and mutual funds were the largest buyers of government debt thus far. However, with additional funds from foreign investors, analysts expect bond yields and the government's borrowing costs to stay capped ahead.

According to a note by IDFC First Bank, net supply of government securities is likely to be Rs 12 trillion in FY25, if the central government keeps fiscal deficit at 5.5 per cent of GDP.

While all the investors, including banks, and pension funds, net purchased bonds worth Rs 4.4 trillion in FY24, this is estimated to rise to Rs 4.9 trillion in FY25. Economists at the Bank expect FPI inflows to take-up Rs 1.6 trillion of this amount in FY25.

Total demand from these three segments alone - banks, investors and index related flows, would account for more than 90 per cent net supply in FY25. Hence demand for g-sec could exceed supply by Rs 90,000 crore this financial year, it said.

This could lead to reduction in cost of capital and in turn also benefit other asset classes.

How have bonds trading ahead of India's inclusion in the JP Morgan Emerging Market Bond Index?
The 10-year government bond yield ended at 6.971 per cent on June 24, 2024. The yields have cooled off over 3 per cent so far this year. From nearly 7.2 per cent yields at the start of the year, they are now below 7-per cent level.

How will JPMorgan Emerging Market Index inclusion impact flows?
As of now, India will be included in J Morgan Emerging market Global Diversified Index, which will lead to inflows worth $23.6 billion into Fully Accessible Route-bonds (FAR-bonds).

FPI holdings of outstanding FAR bonds could rise to 3.4 per cent by April / May 2025.

Will equity markets also rally if India is included in the JPMorgan Emerging Market Index?
While analysts do not see any direct impact on the equity markets from the move, there could be indirect impact for the segment, they said.

According to them, the inclusion of India in the JP Morgan index may keep bond yields in a narrow range, capping the overall cost of capital for the government.

This, in turn, will allow banks to keep interest rates low for Indian corporates as well, which would boost financing and also improve valuations of stock prices.

That apart, another indirect impact that analysts see from the move, for the equity markets, is strengthening of the Indian Rupee vis-a-vis the US dollar.

A stronger rupee will support FPI/FII flows into equities over the medium-term, they said. 

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First Published: Jun 25 2024 | 7:55 AM IST

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