Indian government bonds formally became part of JPMorgan’s Government Bond Index-Emerging Markets (GBI-EM). It is the most widely referenced index for emerging market bonds.
JP Morgan Emerging Market Bond Index
- US-based investment bank JPMorgan Chase & Co. is one of the leading global bond index providers.
- JPMorgan offers a number of indices for various asset classes including developed and emerging markets and credit indices.
- The JPMorgan Emerging Market Bond Index (EMBI) was launched in the early 1990s. It is the most widely referenced index for emerging market bonds.
Weightage of Indian Government Bonds in the Index
- Indian Government Bonds (GIB) are expected to reach a maximum weightage of 10% in the Index.
- Higher weightage in the index will prompt global investors to allocate more money to invest in Indian debt.
- This is expected to lead to inflows of $2-3 billion into India every month.
- India is the 25th market to be included in the JPMorgan Emerging Market Bond Index. This is the first inclusion of India’s sovereign bonds (G-Secs) in a global index.
Indian bonds eligible for index inclusion
- According to JPMorgan, 23 IGBs meet the index eligibility criteria, with a combined face value of about Rs 27 lakh crore or $330 billion.
- Only IGBs designated under the Fully Accessible Route (FAR) are index-eligible.
- In March 2020, the RBI, in consultation with the government, introduced a separate channel called FAR to enable non-residents to invest in specified securities of the Government of India.
- According to JPMorgan, eligible instruments conforming to the index inclusion criteria must have more than $1 billion (equivalent) of nominal issue outstanding and a minimum remaining maturity of 2.5 years.
- At the start of inclusion on June 28, 2024, only FAR-designated IGBs with a maturity date after December 31, 2026 will be evaluated for eligibility.
- Any new index-eligible FAR-designated IGBs issued during the phase-out period will also be included.
Impact on government borrowing
- Government bonds are debt securities issued by a country to support public spending.
- Investors buy these bonds, effectively lending to the government in exchange for periodic interest payments and the return of the principal amount at maturity.
- JPMorgan’s inclusion in the index will enable foreign investors to participate more actively in the Indian bond market.
- Non-resident holdings of Indian bonds are expected to nearly double to 4.4% from the current 2.5% in the next year, according to JPMorgan forecasts.
- This inclusion could lead to capital inflows of up to $40 billion into India over time, according to Goldman Sachs estimates.
- This increase in foreign flows will reduce the government’s reliance on domestic investors to meet its borrowing requirements.
- Higher demand for sovereign bonds will put upward pressure on yields, lowering government borrowing costs over time.
Benefits for businesses
- According to Bloomberg, the government would theoretically meet its borrowing needs from foreign investors, leaving banks with more capital available to invest in businesses.
- Banks could pass on these benefits to businesses in the form of lower interest rates on loans. This could boost business expansion, innovation and overall economic growth.
Possible impact on public welfare
- Lower bond yields mean the government will have to pay less interest on money borrowed.
- This reduction in interest payments could enable investment of resources for other important areas such as infrastructure, healthcare, education and social welfare programmes.
- With lower borrowing costs, the government can manage its budget deficit more effectively.
- The government can borrow more at a lower cost to finance its deficit.
- The move is also likely to have a positive impact on India’s private debt and corporate bond markets.
Impact on Rupee
- When foreign investors buy Indian bonds, they have to convert their currency such as US dollar into Indian rupee.
- In such a situation, the increased demand for rupee leads to increase in its value.
- With more foreign investors entering the Indian bond market, the rupee may strengthen against other major currencies.