India's local bonds will be included in the Government Bond Index-Emerging Markets (GBI-EM) index and the index suite, benchmarked by about $236 billion in global funds, JPMorgan said in a release on Friday.
JPMorgan said 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion are eligible. All fall under the category of "fully accessible" for non-residents.
"India's weight is expected to reach the maximum weight threshold of 10% in the GBI-EM Global Diversified (.JPMGBIEMGD), and approximately 8.7% in the GBI-EM Global index," said JPMorgan.
India's benchmark 10-year bond yield dropped 7 basis points to 7.0788% in opening trade, its lowest since July 27, after the news while the rupee gained 0.3% to 82.25 per dollar early.
Inclusion will start on June 28, 2024, and extend over 10 months with 1% increments on its index weighting, as India is expected to reach the maximum weighting of 10%, JPMorgan said.
"This will provide a large additional pool of passive foreign funding for India. In the medium term it will lower the country's cost of funding," said Sanjeev Sanyal, a member of India's Economic Advisory Council to the Prime Minister.
TALKS BEGAN IN 2019
India began talks on including its debt in global indexes in 2019, while also talking to Euroclear about clearing and settlement.
It removed foreign investment restrictions on some government securities in 2020 as part of an effort to enter global bond indexes with several bonds now part of the "Fully Accessible Route" without any foreign investment restrictions.
But the government's stance on other issues including capital gains taxes and local settlement delayed its inclusion, though it did not actually budge on its stand.
"It would be reasonable to expect inflows to start from now itself, which in the interim helps even the demand-supply gap in balance of payments," said Rahul Bajoria, Managing Director and head of EM Asia (ex China) at Barclays.
"We believe a total of $20-25 billion should come in over the index inclusion horizon, but some front loading is reasonable."
Foreign investor buying in Indian bonds has remained tepid with net purchases of $3.4 billion so far in 2023. Foreign investors own less than 2% of outstanding government debt.
"This announcement is a significant positive for the INR bond in the short-term as investors look to front-run the eventual inclusion," said analysts at DBS in a note on Friday.
In the same announcement, JPMorgan said Egypt's eligibility in the GBI-EM series will be on review for three to six months, due to reports of "material" hurdles in currency repatriation.
"If the hurdles cited by benchmarked investors persist, a status review will be triggered for Egypt's removal from the GBI-EM series," JPMorgan said.
Egypt will remain in the index during the review.
