From June 2024, Indian government bonds will be included in JPMorgan Chase & Co’s emerging market bond index. In fact, the inclusion of government securities in JPMorgan’s Government Bond Index-Emerging Markets (GBI-EM) was widely anticipated for a long time now. India had been on the Index Watch Positive for inclusion since 2021. Bond prices were on the rise, pushing down yields, for the latter half of last month. This was in anticipation of the inclusion into the GBI-EM, the announcement of which came late last month.    

Some 23 government bonds with a combined notional value of $330 billion will be eligible in the bond index. The country is expected to reach a maximum weight of 10 per cent in the GBI-EM, putting it on a par with other big economies like China, Brazil, Indonesia and Malaysia. India’s inclusion in a leading global bond index reflects a maturity of the Indian bond markets to absorb larger investments.  

India’s entry into the JPMorgan index is also testimony to the strength and stability of the Indian economy. This enhanced status will put the country in the reckoning for an inclusion in other global bond indices, though some of them have more stringent conditions.  

The country could soon witness a deluge of investments, especially in its bond markets, ahead of its entry into the bond index. Analysts tracking the bond markets estimate an inflow of between $7 billion and $8 billion in Indian debt. They reason that apart from the JPMorgan announcement, fairly-attractive bond yields and relatively- low volatility of the rupee would prompt investors to pump money into Indian debt. 

After India’s inclusion into the GBI-EM billions of dollars more will flow into the country. Various investment houses peg inflows of between $24 billion and $30 billion in the first year after inclusion post-June 2024. As the passive inflows commence, active inflows could also gather steam. According to a report from Goldman Sachs, the country could attract $10 billion more in active flows. 

Greater inflows into the bond market will bring down borrowing costs for the government. Moreover, it will also result in lower cost of borrowing for the private sector as pricing of most of the corporate bonds is based on the price of the benchmark 10-year government securities. Lower prices will lead to robust bond markets and ease pressure on banks which can lend more effectively. It will serve the economy well too as cost of borrowing drops and more liquidity is available in the market. Larger inflow of foreign currency can ease pressure on the rupee and potentially lead to its appreciation.  

Indian bond markets will further deepen with inclusion in the global bond index. It will deepen the country’s integration with the global financial markets. It will widen the investor base of the government bond market, which hitherto has been dominated by domestic banks and financial institutions. The move may pave the way for a larger number of foreign portfolio investors (FPIs) to enter the government bond market, which is a hot favourite among leading global FPIs.  

Amid multifold gains, there are some shortcomings of India’s entry into the global bond index. And most of the issues will have to be addressed by the Reserve Bank of India (RBI). Managing huge dollar inflows will not be easy. The central bank would be wary to let the rupee appreciate beyond a point as it would hurt exports. On the other hand, mopping up the dollars would mean more rupee liquidity. But the RBI, like all central banks, would find ways and means out of these challenging.