Following JP Morgan’s decision to include Indian Government bonds in its emerging market bond index, foreign investors have flocked to the market. We believe the move will act as a net positive for both India and the index, and bolsters the country’s improving economic outlook.
India has been in the headlines of late, not only for its election which saw Prime Minister Narendra Modi secure a third term, but for the inclusion of its bonds to global debt indices.
“Each month, 1% will be added to its weightage, until Indian bonds hold a total weight of 10% in its [JPM GBI EM] index.”
As of 28 June 2024, JP Morgan began the inclusion of Indian government bonds to its Emerging Market Global Bond Index (JPM GBI EM). 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are eligible for inclusion in the index. Each month, 1% will be added to its weightage, until Indian bonds hold a total weight of 10% in its index.
Since the announcement, foreign investors have bought more than $10 billion of Indian government bonds with foreign ownership of these bonds rising to an all-time high of 4.45%1.
We believe the entry into the benchmark indices is a net positive for India. It will increase capital flows into the country and may be beneficial for stabilising yields. Furthermore, it will allow investors access to India’s $1.3 trillion government bond market. However, inclusion in global indices could also potentially increase volatility and vulnerability for Indian government bonds during periods of significant events and global shocks.
As a result of inclusion in the index, many of the inflows will come from passive or index linked funds. Unlike active managers, these funds do not have the ability to adjust exposure, and therefore will remain invested regardless of the macro outlook or fundamentals. However, as active investors, we are in a position to be more selective should India’s economic outlook deteriorate or become overvalued.
Improving economic outlook
However, in our view, it does not necessarily change the country outlook. We have been overweight at a country level which has been achieved particularly via exposure to the India rupee. The inclusion comes at a time of improving economic outlook for India. India’s GDP grew at 8.2% for the fiscal year ending in March 2024, making it the world’s fastest-growing economy2.
The Indian government has also pursued a policy of fiscal consolidation with a goal of reducing its deficit to below 4.5% of GDP in the next two years. Furthermore, the current account position of India has improved markedly over the last five to 10 years. The reserve accumulation has continued to improve, whether as a result of still increasing foreign direct investment, equities or debt, meaning the volatility of the currency is low and India should be relatively insulated from global shocks. As a result, India remains quite favourable, especially in the context of yields having hovered around 7%.
A more diversified benchmark
The inclusion will also act as a net positive for investors in the benchmark. Currently the JPM GBI EM is quite concentrated; India’s inclusion will act as a diversifier and the weighting of other countries in the index will be brought down. This is particularly important following Russia’s exclusion from the index in March 2022.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.