What Will Be The Impact Of India's Inclusion In JP Morgan Index On The Economy?

Inclusion of India's sovereign bonds into JP Morgan's emerging markets bond Index is not just expected to bring billions of inflows into the country but also aid the government in its fiscal measures to influence the economy.

According to JP Morgan, India is expected to reach the maximum weight of 10 per cent in the Global Diversified Index (GBI-EM GD), and the inclusion will be staggered over a 10-month period from June 28, 2024 to March 31, 2025, which means an inclusion of 1 per cent per month.

India’s addition to the index is expected to improve the rating of its sovereign debt as the index has $236 billion in assets bench-marked against it and is tracked globally.

At present, S&P Global Ratings has given a BBB- rating to India’s credit.

Since a total of 23 Indian governments bonds with a cumulative value of $330 billion will be included in the GBI-EM Global Index, the move is set to reduce the borrowing cost for the government.

Reduction In Borrowing Cost

Mukesh Kochar, National Head – Wealth at AUM Capital said the inclusion will reset the base rate for India and bring down the domestic bond yields sharply.

Analysts see the price of the 10-year benchmark 7.26 per cent, 2033 government bond, which settled at Rs 100.63, or 7.17 per cent yield on Thursday, nearing 7.05 per cent by September end.

Considering the cost reduction, the inclusion puts the Indian government at advantage as it plans to raise up to Rs 6.55 lakh crore through sale of bonds in the second half of 2023-24.

 “India’s cost of borrowing will come down. Since covid, the fiscal deficit in India has remained elevated due to higher borrowing.  This event will ease borrowing pressure as a large part of the borrowing will be observed by this route,” Kochar said.

India’s fiscal deficit, which is expressed as a percentage of the country’s GDP and difference between government’s total expenditure and revenue, stood at 6.4 per cent in 2022-23, and 6.7 per cent in 2021-22.  

As a result of government’s heavy expenditure following the Covid outbreak in 2020, fiscal deficit for 2020-21 had reached to 9.3 per cent of the GDP.

Deeper Benefits

 “Structurally, this will lower India’s cost of funding; enhance the liquidity and ownership base of G-Secs (Government Securities) and help India finance its fiscal and CAD. This will also imply more accountable fiscal policy-making ahead,” said Madhavi Arora, Chief Economist, Emkay Global Financial Services.

The inclusion is further expected to provide relief to India’s current account deficit, currently under stress due to rising oil prices in the international market, by channelling fresh flows in the debt market at reduced cost.

Besides the government debt market, the domestic corporate bond market is also set to avail the benefits of the move from offshore participation. “In the medium to long term, enhanced foreign participation may gradually reduce the yields on corporate bonds too,” said Shantanu Bhargava, Managing Director and Head of Discretionary Investment Services, Waterfield Advisors.

Another beneficiary to the inclusion is the Rupee with lower cost of borrowing and expected inflows between June 2024 and March 2025 supporting the Indian currency against the Dollar and volatility in the global commodities market.

However, despite calling it a celebration for the long run, experts are of view that the immediate effects may get mitigated for some time tracking global market sentiments.

Arora said once the initial euphoria ends both the bond yields and the Rupee might reverse their gains. For projections, she has pegged the Rupee to range between 82.25 a dollar and 84.25 a dollar in the second half of 2023-24, and government bond yields to fall below 7 per cent by end of the current fiscal.