JPMorgan has confirmed that India is on track to secure inclusion in the bank’s emerging market debt index, in a move that analysts say could boost foreign investment inflows into the South Asian country.
The JPMorgan indices are a popular benchmark for money managers that trade and deal in emerging market debt. The indices are used to measure the performance of specific bonds issued by governments that have met JPMorgan’s structural requirements and liquidity standards.
As the index is widely used as an industry benchmark, countries which are not included on the index tend to have relatively less demand for their bonds than would otherwise be the case. Money managers tracking JPMorgan’s index will inevitably not invest in a bond that is not listed on that index.
India has been excluded from the JPMorgan emerging market debt index up until now. This has largely been because of bureaucratic reasons: Indian regulators demand that those investing in Indian assets go through elaborate documentation procedures.
However, it seems that these issues are on the verge of being resolved and that India will soon be included in the index.
Indeed, JPMorgan’s global head of index research Gloria Kim recently spoke about the prospect of India joining the index. She said that “based on the annual Index Governance Consultation process, market feedback so far has been largely positive, with the majority of our index clients already to set up to trade in the IGB market.”
“As always, there are still teething issues when entering a new market, however we have found these to be related mostly to the operational readiness and flexibility of counterparties and custodians rather than barriers to entry,” she said.
This could have several significant ramifications for Indian markets and the Indian economy. JPMorgan itself has estimated that foreign inflows into India will be between $20-25 billion following its inclusion into the index.
Anubhav Sahu, equity research analyst at Moneycontrol Research in Mumbai, told Disruption Banking that the benefits of these inflows are likely to be profound in several different ways. For one, more cash on Indian bond markets could drive down yields and therefore allow the Indian government to borrow money at a cheaper rate, helping spur investment and economic growth.
“The planned inclusion of India’s local bonds in the JP Morgan’s Government Bond index by June 2024 should lower the cost of borrowings for the economy over the period,” Sahu said. “Inclusion helps in better liquidity for these bonds and therefore positively impacts the country’s macro-economic growth. This in turn helps in lowering risk premium leading to lower yields.”
He also added that these inflows could drive up demand for the rupee, as investors will need to sell their currencies and purchase the Indian rupee in order to purchase rupee-denominated bonds. “The expectation has been for inflows of $30 to $40 billion over the course of the inclusion of Indian bonds in such indices. Significant forex inflows will support the local currency,” Sahu noted.
Harsh Agarwal, a hedge fund manager based in Mumbai, strikes a similar optimistic tone. He told Disruption Banking that “this bodes very well as far as foreign investment flows are concerned.”
“It will lead to both active flows, that are more front-loaded and in part tactical, and passive flows according to India’s weight in the index. Total flows may be $25-30bn in a year’s time,” he added.
“Indian government bonds are very attractive for global investors as they are among the least volatile bonds, coupled with a very stable currency thanks to a consistently improving trade balance outlook for the country. The one catch might be withholding tax on government coupons and claiming credit for the same might be a bit hassle. As an asset manager, I am designing vehicles and strategies to make it easier and more attractive for foreign investors to tap this opportunity.”
The upcoming inclusion of India in JPMorgan’s emerging market debt index potentially reflects some broader facts about the state of the Indian economy. India has now risen to become the world’s fifth largest economy, with India’s National Stock Exchange (NSE) now the world’s largest derivatives exchange by number of contracts traded.
Earlier this year, the Indian stock market briefly overtook Hong Kong’s as the fourth biggest equity market in the world. More and more international hedge funds and financial institutions are seeking greater exposure to Indian markets, particularly those rotating assets out of China but wanting to retain them in the wider Asian market.
Given this, it is unsurprising that JPMorgan is seeing great demand for Indian bonds and is now taking the step of including these bonds on a crucial index. The economic benefits that could be unlocked for India are likely to be significant in the months and years ahead.
Author: Harry Clynch
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