Bond Index Inclusion: Focus on the Impact on India’s Debt Market

Last week, the US bank JP Morgan announced the addition of Indian government securities (G-Secs) to its emerging markets bond index with effect from June 2024.

This move is expected to draw capital inflows estimated at US$22-30 billion into India’s debt market, even before the official inclusion, which would significantly influence the investor base while improving market liquidity, financial experts say.

As per JP Morgan, India’s G-Secs will be included in its Global Bond-Index Emerging Markets (JPM GBI-EM Index) effective from June 28, 2024. Indian bond market is estimated to be more than US$ 2 trillion

There are 23 Indian government bonds with a total value of US$330 billion that are eligible for the index. However, the inclusion of the G-Secs will be staggered over 10 months through March 31, 2025, i.e. the inclusion of 1% weight per month, as per JP Morgan.

Overall, this move carries significant implications as it would provide a fillip to the Indian debt market and could act as a catalyst for deepening the bond market.

In the medium to long term, enhanced foreign participation could result in reduced yields on G-Secs. This, in turn, may gradually (medium or long-term) decline the yields on corporate bonds, too.

Furthermore, this could lead to a reduction in the cost of capital and cost of borrowing over the long term. Also, it could positively impact India’s currency in the medium to long run.

The move is expected to reset historical spreads by 20-25 basis points (bps) downwards, which would result in a lower capital cost of borrowing for the country. In addition, the increase in forex reserves will contribute to a considerable improvement in the external fundamental situation for India.

The growing importance of India among global investors can be suitably underscored with this move, especially at a juncture when investors are eyeing alternatives to China.