JP Morgan Chase has finally decided to include Indian Bonds issued by the Reserve Bank of India in its Emerging Market Bond Index with effect from June 28, 2024. Moreover, India is expected to be assigned up to 10 per cent weight in this Emerging Market global index and all this is no small an achievement for the India’s Debt market.
At present there are 23 Indian government bonds having a combined notional value of USD 330 billion which reportedly satisfy the eligibility conditions as prescribed for the inclusion in the EM Bond Index. Currently, the Bonds having a notional outstanding of more than $1 billion and at least 2.5 years of remaining maturity are reportedly considered as being eligible for this purpose.
The GBI- EM Global Index currently accounts for around USD 236 billion in global funds. The eligible Bonds may be included over a period of 10 months from the effective date of inclusion such that by March 2025, India shall be eligible for an inflow of over $20 billion of funds. Indian Bonds are at par with Chinese bonds in the sense that it also would have 10 per cent weightage in the Index.
India’s debut in EM Bond Index will deepen the Indian Debt Market
The basic purpose of any index is to track the movement of the financial instruments on which it is based. In simple terms, indices serve as guides to investments. Thus, a Global bond index helps investors track the movement in bonds in multiple jurisdictions facilitating relative comparisons and is therefore, often used as a benchmark for investors to make their investments in bonds that it comprises of. Indian Bonds will now be considered by mutual funds, pension funds and other large investors that typically prefer to hold investments for longer periods.
Such an access to the international bond market will give India an opportunity to showcase its strength vis a vis other similar instruments and get a slice of the funds being invested in government bonds from investors that are looking for safer and more attractive returns through their investments. This will help Indian debt market gain more depth as the number of prospective participants in the Indian debt market would increase in a big way. It is just like getting another avenue to raise resources from.
The Indian equity markets are already considered as one of the most open to foreign portfolio investment. At the same time they are perceived as highly regulated markets and so they attract a large chunk of foreign portfolio investments.
Inclusion of eligible bonds in the GBI- EM Global Index will be just like an icing on the cake for Indian securities market as now more such Global Bond Indices across the world such as Bloomberg Barclays and FTSE may also consider Indian bonds for inclusion in their respective global and local indices. And this only will enhance the breadth and depth of the Indian debt markets.
Indian rupee to get more strengthened
India is a still a developing economy, but it has the distinction of being the fastest growing economy in the world and has been consistently showing its mettle the way it bounced back from the setbacks like global recession and the pandemic lock downs and of late the prolonged Russia-Ukraine war related sanctions and rising petroleum prices; thus exhibiting a great deal of resilience amid adversities of all sorts.
Increase in access to global markets will attract both active and passive funds flow into Indian economy which will help keeping its current account in balance to a certain extent and thus give some strength to the Indian rupee on the back of relatively larger foreign exchange resources in the country. Appreciation in Indian rupee may not go well with its exports but to the extent the cost of borrowing may reduce due to strengthening of rupee, it will help Indian firms scale up their operations and realize economies of size and if that happens it will somehow benefit them in the long run.
Access to global bonds market will ease twin deficit syndrome
Recently, India’s forex reserves stood at $593.04 billion as of September 15, 2023 compared to $593.9 billion for the week ending September 8, 2023 according to data from the Reserve Bank of India (RBI). Incidentally, it was at its 4-month low since July, 2023. However, the decline in reserves is reported to be due to Forex reserves to have taken a hit on account of greater intervention by the RBI in the currency market.
With the strengthening of Indian rupee the need for using forex reserves as a tool to defend the rupee amid global pressures shall reduce to some extent as the RBI may rather would like to think of ways to keep appreciation of the currency under check! Though as the cost of borrowing may reduce, it will ease out pressures on fiscal deficit too. And if the twin deficit problem, that India often finds as a challenge to reckon with, could somehow be managed with increased forex flows into the economy, it will only usher in an era of sustained growth in the economy, which I would rather term as a self propelling growth engine era where with some checks and balances put in place, Indian economy could proceed towards its next milestone of becoming a $5 trillion economy anytime soon in the next few years.
To conclude, increased access to the global markets will provide stability to Indian currency, give a boost to foreign investment in India, increase India’s chances to participate in many other global and local bond indices abroad.
India’s growth story has become the center of attraction across nations, particularly the way it has made rapid strides towards inclusive growth through digitization, a series of reform measures at macro and micro levels, and giving boost to all major categories of infrastructure.
The G20 leadership also seems to have culminated into projecting India as reliable growth partner for leading advanced and emerging economies of the world. For now, we keep our fingers crossed and hope that India will make the best of this new development in the field of securities markets in the years to come