Inclusion of India in the Global Bond Index for Emerging Markets
India is set to join the JPMorgan Global Bond Index-Emerging Markets (GBI-EM) in the middle of next year, marking a significant milestone in the country's integration into global capital markets.
The GBI-EM is a widely followed global index by dedicated emerging market investors. It is a global fixed income benchmark that provides a comprehensive representation of the emerging markets' bond market. India's inclusion in this index will make the EM benchmark investment more diversified and representative of economic potential and market capitalization.
The announcement of India's inclusion in the GBI-EM, starting from June 28, 2024, carries several key implications.
Diversification of Investor Base
Inclusion in the GBI-EM will significantly broaden foreign investor participation in Indian government bonds. India is expected to attain a 9-10% weight in GBI-EM by market value, making it the second-largest component after China. This will attract passive portfolio flows from global investors who track the index.
Increased Investment Appeal
Being part of such a benchmark enhances the global visibility and credibility of Indian debt. It signals India's growing integration with the global financial ecosystem and improves the attractiveness of Indian government securities due to their improved accessibility and liquidity. The recent S&P sovereign rating upgrade to BBB with a stable outlook further solidifies investor confidence and may boost inflows.
Cost of Funding
Increased foreign participation typically translates into stronger demand for government bonds, which can lower yields and the government's cost of borrowing. Early inflow trends post-announcement showed sustained foreign portfolio investment (FPI) inflows averaging around INR 11,500 crore per month, although flows dipped temporarily when India-US yield spreads narrowed. Greater foreign demand from index inclusion and additional channels like foreign trade rupees being invested in government securities (via SRVAs) support auction depth and price stability, positively impacting borrowing costs.
Phased Weight Increase
India’s allocation in the GBI-EM starts at 1% in June 2024 and will increase monthly by 1% until reaching 10% by March 2025. This gradual inclusion allows orderly market adjustment and predictable build-up of foreign holdings.
Market Development and Liquidity
The inclusion is expected to lead to more robust foreign participation, elevating secondary market turnover and liquidity of Indian government bonds. This supports the development of a more mature and globally interconnected bond market in India.
In summary, India's GBI-EM inclusion will enhance diversification for global investors, improve the investment appeal and credit perception of Indian bonds, and can help reduce the government's cost of funding via increased foreign demand and market depth. This represents a major step toward India’s integration into global capital markets.
For more detailed discussions on this topic, you can watch the latest Asia Insights video featuring our Global Head of Emerging Markets and APAC Research, Sameer Goel. The video, which provides insights into the three key points about India's inclusion in the GBI-EM index, can be found at the provided link for the full transcript. The video is a testament to India's growing economic prowess and the recognition it has received in the global financial community.
[1] Asia Insights video on India's inclusion in the GBI-EM index: [Link to the video] [2] JPMorgan Global Bond Index-Emerging Markets (GBI-EM): [Link to the index] [3] S&P Global Ratings: [Link to the rating agency] [4] Foreign Trade Rupees (FTR): [Link to the FTR information] [5] Reserve Bank of India: [Link to the RBI website]
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