India in JPMorgan index. Equity-like returns likely for long-term investors in government bonds

Finance Ministry on Friday expressed confidence that JPMorgan’s decision to include Indian government bonds in its widely tracked emerging market debt index will reward long-term investors.

“It is a welcome development showing confidence in Indian Economy,” Economic Affairs Secretary Ajay Seth said.

Echoing his views, Chief Economic Advisor VV Anantha Nageswaran said that JP Morgan has made this decision on their own.

It attests to the confidence that financial market participants and financial markets, in general, have on India’s potential and growth prospects and its macroeconomic and fiscal policies.

“Just as long-term equity investors have been amply rewarded by investing in Indian markets, so will benefit long-term investors in Indian government bonds,” he said.

Also read: What India’s inclusion in JPMorgan’s bond index means for its markets

JPMorgan announced that India will be included in GBI EM Global Diversified Index (GBI EM GD) which has funds (AUM) to the tune of $213 billion benchmarked to it. India will get a weight of 10 per cent which will be added from next year; 1 per cent will be added per month (June 28 2024 to March 31 2025).

India is also expected to enter other JP Morgan bond indices—JADE Global Diversified index, JESG GBI-EM index and other aggregate suite of local currency indexes.

According a report by HDFC Bank, the AUM of funds tracking JP Morgan GBI-EM family of indices are $236 billion. The index inclusion could result in inflows of $23.6 billion into FAR g-secs starting from next year and completed by April/May 2025. FPI holdings of outstanding g-sec could rise to 3.4 per cent by April/May 2025 against 1.7 per cent in September 2024, it said.

JP Morgan is one of the most popular global bond market indices. 

For global investors, tracking each market individually on a periodic basis may not be practical. Hence, being part of the index helps in getting noticed. 

According to Morgan Stanley, inclusion in the global index could see investors pump $30 billion into India’s bond market within 10 months and $170 250 billion over the next decade.

Also read: JPMorgan includes India in emerging market debt index: Here’s what analysts said

JP Morgan estimate that foreign ownership in G-Secs may increase to 10 per cent from the current level of less than 2 per cent. While there has been a push for India’s inclusion in the index since 2013, the gush of liquidity is the biggest advantage of this process.

Similar to developed markets, India has been keen on increasing the participation of bond funds rather than bank funds in the debt market. Index inclusion could bring in liquidity depth and help realise this objective. However, once on a global platform, with active supervision on returns, there is risk of an increase in currency volatility. 

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