Global financial firm J.P. Morgan has announced its intention to incorporate Indian government bonds (IGBs), also known as government securities (G-Secs), into its benchmark Emerging Market index starting next year. This move is anticipated to reduce borrowing costs for the Indian government.
The inclusion of IGBs will occur gradually over a 10-month period, spanning from June 28, 2024, to March 31, 2025, with a one percent increase in its index weight at each stage. J.P. Morgan's statement on Friday indicated that India's weight in the GBI-EM Global Diversified index is expected to reach the maximum weight threshold of 10 percent and approximately 8.7 percent in the GBI-EM Global index.
This inclusion is likely to attract higher foreign investment, especially from overseas funds that are mandated to track global indices. It will also pave the way for substantial passive investments from abroad, reducing crowding out and making more domestic capital available for various industries.
Economic Affairs Secretary Ajay Seth welcomed the move, stating that it demonstrates confidence in the Indian economy. Chief Economic Advisor V. Anantha Nageswaran echoed this sentiment, emphasizing the positive outlook for India's growth and macroeconomic policies that this decision reflects.
The Finance Minister, Nirmala Sitharaman, had previously announced in the 2020-21 Budget speech that certain categories of government securities would be fully accessible to non-resident investors, along with domestic investors. These specified securities, included in the indices, will not have a lock-in requirement.
Experts view the gains from IGBs' inclusion in global indices as outweighing the associated risks. Axis Mutual Fund estimates that passive trackers of the relevant indices amount to approximately USD 250 billion, and the staggered approach suggests an inflow of USD 1.5 – 2 billion per month in the 23 identified bonds.
This significant flow of funds is expected to enhance India's global profile and strengthen its local fundamentals. AUM Capital National Head-Wealth, Mukesh Kochar, highlighted that India's portion in the JP Morgan index will be 10 percent, amounting to USD 24 billion, effectively resetting the base rate for India and leading to a sharp decrease in yield and the cost of borrowing.
Given the fiscal deficit remaining elevated due to increased borrowing since the onset of the Covid pandemic, Kochar emphasized that this development would alleviate borrowing pressure, as a substantial portion of the borrowing will be facilitated through this channel, resulting in mark-to-market gains for banks' Treasury.