American investment bank JPMorgan Chase & Co. has taken a big decision to include Indian government bonds in its emerging markets debt index.This move is expected to widen the investor base and potentially lead to the appreciation of the Rupee.
JPMorgan Government Bond Index-Emerging Markets (GBI-EM) index
- The JP Morgan GBI-EM is a widely followed and influential benchmark index that tracks the performance of local-currency-denominated Sovereign Bonds issued by emerging market countries.
- It is designed to provide investors with a representative measure of the fixed income market within emerging market economies.
- It Includes government bonds issued by various emerging market countries.
- The composition may change over time based on eligibility criteria.
India’s Inclusion
- JPMorgan has identified 23 Indian government bonds with a combined nominal value of USD 330 billion as eligible for inclusion in the GBI-EM.
- India’s weight is expected to reach the maximum weight threshold of 10% in the GBI-EM Global Diversified, and approximately 8.7% in the GBI-EM Global index.
- India’s local bonds will become part of the GBI-EM index and its suite of indices, which serve as benchmarks for approximately USD 236 billion in global funds, as per JPMorgan.
Significance of India’s Inclusion in GBI-EM Index
Enhanced Investment Attractiveness
- India’s inclusion in the GBI-EM index positions India as a coveted investment destination.
- It can attract global investors seeking opportunities in emerging markets, potentially resulting in substantial inflows of USD 45-50 billion over the next 12-15 months.
Economic Stability and Financing Ease
- It can ease financing constraints related to India’s Fiscal and current account deficits by providing an alternative source of funds.
- It structurally lowers India’s risk premia and funding costs, fostering economic stability.
- Risk premia refers to the amount by which the return of a risky asset is expected to outperform the known return on a risk-free asset.
- Equity market exposure is the best-known risk premium, rewarding investors for taking exposure to long-only equity investments.
Positive Impact on Various Sectors
- Corporate Sector: The inclusion is expected to lower the entire Yield Curve, reducing the cost of financing for the corporate sector. Narrower corporate bond spreads will stimulate investment and business growth.The Yield Curve is a graphical representation of the interest rates on debt for a range of maturities.
- Banking Sector: With lesser pressure to absorb government bonds, banks can allocate more resources for lending to the private sector, promoting economic expansion.
- Infrastructure Development: India’s ongoing infrastructure development initiatives receive a boost as the inclusion provides a sustainable source of long-term financing through government securities.
- Currency Appreciation and Stability:The inclusion will lead to an appreciation of the Indian rupee due to increased investor confidence.A stable exchange rate enhances the attractiveness of investing in India.
- Market Development and Innovation:Integration into global markets, supported by ongoing reforms and increased market access, propels market development and encourages long-term capital inflows.It sets the stage for the introduction of innovative financial products.
- Par with other Countries:India is expected to reach a maximum weightage of 10 % in the GBI-EM Global Diversified Index, putting it at par with others like China, Brazil, Indonesia and Malaysia.