Explained: What JP Morgan's bond inclusion means for India, markets, rupee
India is poised to receive significant financial inflows following JP Morgan Chase & Co's groundbreaking decision to include Indian bonds in its emerging market index. Currently, foreign investors hold a mere two percent of Indian debt, a figure expected to double after the upcoming inclusion. This move is anticipated to bring substantial capital to India, with index tracking managers allocating tens of billions of dollars.
Impacts on India's Financial Landscape:
Positive Outlook for Borrowing Costs: Analysts predict that the inclusion will lead to a positive shift in India's financial landscape. The increased foreign investment is expected to reduce the cost of borrowing for the government, provide support to the Indian rupee, and enhance the country's credit rating.
Inclusion in JPM GBI-EM Global Diversified Index: Effective from June 28, 2024, India will be included in the JPM GBI-EM Global Diversified Index, gradually reaching the 10% cap over a 10-month phased period until March 31, 2025.
Estimated Inflows and Market Impact: Analysts estimate that India could witness inflows of over $40 billion in the next 18-21 months, with a phased-in period completion by March 2025. The impact is expected to be positive, particularly for bonds with maturities exceeding five years.
Outlook on Bond Yields and Borrowing Costs: India's fiscal deficit and significant government borrowing create a demand for additional funds. Analysts predict a 10-15 basis points fall in benchmark bond yields to 7%, benefiting corporate borrowers whose costs are benchmarked against government bonds.
Foreign Exchange Implications: Increased foreign flows are anticipated to strengthen the Indian rupee, making it easier for India to finance its current account deficit. Beyond immediate benefits, the development is expected to have long-term structural advantages for rates and FX markets.
Global Recognition and Future Indices: The inclusion in JP Morgan's index could pave the way for India's entry into other widely tracked indices, such as the Bloomberg Global Aggregate Index, potentially resulting in additional inflows of around $15 billion.
Challenges and Considerations:
Potential Outflows in Other Markets: India's inclusion in the index may lead to outflows in other markets, with weightings for domestic government bonds issued by other countries expected to shrink. Thailand is projected to experience significant losses in this context.
Volatility and Regulatory Considerations: While increased foreign inflows are beneficial, they may introduce volatility to both the bond and currency markets. Regulatory bodies and the central bank may need to actively intervene to manage potential fluctuations.
Criteria for Further Inclusions: Prospects for India's inclusion in other major bond indices, such as the Bloomberg Global Aggregate Index and the FTSE Russell World Government Bond Index, depend on factors like Euroclearability and a higher sovereign credit rating.
Conclusion:
JP Morgan's decision to include Indian bonds in its emerging market index marks a pivotal moment for India's financial landscape. The anticipated influx of funds is expected to reshape borrowing costs, strengthen the rupee, and position India as an attractive destination for global investors. As the country navigates the challenges and opportunities associated with this development, the macroeconomic outlook remains positive, reinforcing India's standing in the global financial arena
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