India’s inclusion in the JP Morgan EM Bond Index – another green shoot or just hype?

Published on August 6, 2024 by Puneetkumar Singal

On 21 September 2023, JP Morgan announced that it is planning to include Indian government bonds (IGBs) in its emerging-market indices, namely the Government Bond Index – Emerging Markets (GBI-EM) and the Emerging Markets Bond Index (EMBI).

Twenty-eight IGBs, worth over USD400bn, will be included in the index from 28 June 2024 to 31 March 2025, resulting in increased weightage for India of 1% per month.

What is the JP Morgan GBI-EM Index?

The JP Morgan GBI-EM Index tracks local-currency bonds issued by emerging-market governments.

India’s expected weightage after inclusion

After their inclusion on 31 March 2025, IGBs are expected to have a maximum weightage of 10% in the GBI-EM Global Diversified Index, 8.7% in the GBI-EM Global Index and the 14.59% in GBI-EM Global Diversified IG 15% Cap Index.

Why all the hype?

INR appreciation against the USD

• The JP Morgan GBI-EM Index tracks bond movement in local currency

• With the inclusion, all the investment (c.10% weightage) will be in INR. Bond exchange-traded funds (ETFs) and mutual funds (MFs) that replicate this bond will passively invest money in these IGBs

• This would eventually result in more inflow of foreign currency (especially USD), strengthening the INR

Increased weightage of longer-duration bonds

• Confidence in India has increased, as the chart below shows

• Weightage of investment in bonds with maturity of 10+ years through the fully accessible route (FAR) increased to 18% in June 2024 from 11% in September 2023

• Higher-duration investment signifies a more stable economy

Interest rates

• Owing to increased investment in IGBs, their prices are increasing

• This increased pricing would eventually lead to reduced yields (the bond price and yield have an inverse relationship; when one goes up, the other goes down)

• This would help the Indian government and companies raise money at lower interest rates in global markets

• This would ultimately result in more spending on infrastructure or other capex requirements at the domestic level

Charts 3 and 4: Declining bond yields

India’s FX reserves

• India’s USD FX reserves reached a high of USD655.8bn in June 2024

• India’s bond inflow increased to USD10bn in June 2024; this is expected to increase further, to c.USD30bn in the next 10 months, increasing FX reserves

• This increased inflow would also help improve USD FX reserves

Conclusion

The inclusion of IGBs in the bond indices is a net positive for India in a number of areas, i.e., it improves sentiment and confidence in the Indian economy; increases FX inflow; reduces yields, benefiting interest rates; enhances liquidity; and reduces risks.

Case study

An improved or strengthening INR is always positive for any foreign investor

A, a US investor, was looking to make a bond investment worth USD10m on 28 June 2024

• USD1 = INR83.3 (USD1,000,000 = INR83,300,000)

• 10-year bond yield = 7.008% (on 28 June 2024)

• 10-year US Treasury yield = 4.34% (on 28 June 2024)

• With the IGB inclusion, A has a net profit (excluding exchange fees or commissions) of c.267bps (7.008% - 4.34%) on the yield differential

• In addition, his liquidity increases owing to India’s increased weightage of 10% in the bond market

With the INR strengthening, his currency risk reduces

Example:

• At the time of exchange (exit) the INR appreciates; USD1 = INR80

• The investor will get his initial investment back, i.e., INR83,300,000 (excluding all coupon payments and considering just the bond value); this will fetch him USD1,041,250

• This is an excess gain of USD0.041m, just owing to the INR strengthening

In conclusion, the US investor benefits in two ways, i.e., better yield and an exchange-rate benefit with reduced risk.

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Sources:

• US Dollar to Indian Rupee Exchange Rate Chart | Xe

• India 10-Year Bond Historical Data – Investing.com India

• US10Y: 4.285% +0.017 (+0.3983%) (cnbc.com)

• Switch to India’s longer-dated bonds extends as index date nears (moneycontrol.com)

• Foreigners Flocking to India Bonds Make Splash Across Market – Bloomberg

• Citi Sees Global Investors Staying in India Bonds After JPMorgan Index Inclusion – Bloomberg

• India forex reserve: Budget 2024: Ahead of Sitharaman’s big announcement, a look at govt’s forex war chest to deal with external shocks – The Economic Times (indiatimes.com)

• Flows to Indian Bonds Back to $10 Billion Before Index Inclusion – BNN Bloomberg

• India set for billions of dollars of inflows as bonds join JPMorgan index (ft.com)

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