JP Morgan bond index India inclusion this week: Explained key changes, flows, impact on yields, what should investors do

Indian Government Bonds are set to be included in the JP Morgan Government Bond Index – Emerging Market (GBI-EM) from June 28. The inclusion will occur over a period of 10 months starting Friday through to March 31, 2025.

India will have a 1% weight in the JPMorgan EM Bond index, which will gradually rise to 10% over a 10-month period. The inclusion is estimated to bring $20-22 billion of inflows into the India bond market.

Let us take a deep dive on the process, meaning and impact of Indian bonds’ inclusion in JPMorgan emerging market indices.

What’s happening?

Global index provider JPMorgan on September 21, 2023, had announced that it would include India government bonds in its emerging market indices, including EMBI, GBI-EM and CEMBI series. The inclusion will occur over a period of 10 months from June 28, 2024, through to March 31, 2025, at the inclusion rate of about 1% weight per month.

Only Indian government bonds issued by the Reserve Bank of India (RBI) under the Fully Accessible Route (FAR) will be included in the indices. All FAR-designated IGBs maturing after December 31, 2026 will be eligible.

Also Read: JPMorgan on track to include India in emerging market debt index from June; How will it impact Indian bonds and yields?

The 7.18% benchmark 10-year government bond maturing in August 2033 will hold the highest weightage at 0.59%. The 40-year bond maturing in June 2053 and the 13-year bond maturing in July 2037, both will have weightages above 0.5%. 

Key Changes

The index weighting of India bonds is expected to reach a maximum weight of 10% in GBI-EM Global Diversified Index, 8.7% in the GBI-EM Global Index and 14.59% in the GBI-EM Global Diversified IG 15% Cap Index.

Europe, Middle East and Africa (EMEA) area is estimated to see the largest regional hit to index weight. EMEA EM's aggregate weight is expected to drop to 26.2% by March when India's inclusion is complete compared to around 32% at the start of this month, Reuters reported.

With India’s addition, Asia’s weight is estimated to increase to 47.6% in the index, HSBC Plc said in a note.

Also Read: India’s long-dated bonds are ‘clarion call’ for investors

Flows

Indian bonds inclusion in the JPMorgan index is estimated to draw $20 billion to $25 billion of global flows into local debt. However, India’s index-eligible bonds have already attracted $10 billion since the inclusion was announced in September last year.

According to Morgan Stanley, investors tracking the index have already positioned for India’s inclusion, with 3.6% of their assets allocated to the nation’s sovereign debt at end-May, a Bloomberg report said.

Speaking on the impact on huge foreign fund inflows, Reserve Bank of India (RBI) Governor Shaktikanta Das on June 7 had reiterated that there were no worries on expected heavy inflows from global bond inclusion.

Also Read: Why the mutual fund industry is betting on duration funds

“The RBI has a number of instrumentalities to manage the flows. We have managed it in the past and we will manage it in future also. No worries on that,” Das said during the last post-policy press conference.

Meanwhile, estimates suggest that India’s inclusion in the JPMorgan’s GBI-EM index may draw a combined $11 billion away from South Africa, Poland and Thailand’s local markets.

JPMorgan analysts said India’s entry was likely to pull $4.7 billion from South Africa, $3.3 billion from Poland and $3.2 billion from Thailand. It will also pull $2.9 billion and $2.5 billion from the Czech Republic and Chile respectively, according to a Reuters report.

Also Read: Bond yields expected to drift lower over next one year; What should investors do?

Impact on Indian bonds, yields

The index inclusion related heavy flows is likely to boost demand for Indian government securities in FY25, once short-term liquidity issues in certain papers get sorted. While this augurs well for keeping yields down, it could also induce some bouts of volatility, analysts said.

The benchmark 10-year government bond yield has already fallen below 7% and ended at 6.971% on June 24, 2024. The local bond yields have cooled off over 3% so far this year from nearly 7.2% at the beginning of the year.

The yields are further expected to continue the slide amid rising demand for bonds, increasing bets of interest rate cuts by the central bank and cooling inflation.

“We expect long bond yields to continue to drift lower over the next couple of quarters. We expect the benchmark 10 year bond yield to go towards 6.50% by Q4 of FY25,” said Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.

Also Read: Indian 10-year bond yields drop below 7% amid cooling inflation, rate cut hopes

SBI Capital Markets also believes the outlook on bond yields is titled to the downside.

“Downward pressures transcend beyond policy, led by prominence of supply-demand factors. While the entire curve welcomes cuts, impact on the shorter-end tends to be more pronounced & faster. 10-year Union G-sec yields have already descended below 7% and are expected to continue the descent. Additionally, we expect them to fall by 25-30 bps from current levels with the curve witnessing a bull steepener,” SBI Capital Markets said in a note.

Palka Arora Chopra, Director, Master Capital Services Ltd. noted that the inclusion of Indian bonds in the index involves 27 bonds with an average maturity of approximately seven years and a yield to maturity of about 7.09%.

“The inclusion is expected to attract substantial foreign investment, with non-resident holdings anticipated to almost double from 2.5% to 4.4% within the next year. The anticipated capital influx, estimated to potentially reach $40 billion, will enhance the depth of the bond market, diversify sources for government borrowing, and lower borrowing costs,” she said.

What should investors do?

Investors with medium to long term investment horizon can consider Dynamic Bond Funds having duration of 6-7 years, with predominant sovereign holdings as they offer a better risk-reward currently, according to Pal.

Investors having an investment horizon of 6-12 months can look at Money Market Funds as yields are also attractive in the 1 year segment of the curve, he added.

(With inputs from Agencies)

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