30/09/2024
With the announcement by JPMorgan in the early hours of September 22, 2023, India’s inclusion in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) global index suite, starting from June 28, 2024, is a significant development for the country’s economy. This move comes after a big push by India to enhance its standing in international financial markets. The inclusion will be gradual, with India’s index weighting increasing in 1% increments over ten months until it reaches a maximum of 10%.
Key points and potential impacts of this inclusion:
• Foreign Investment Inflows: Economists estimate that India’s inclusion in the JP Morgan index could lead to inflows of up to $25 billion in the government debt market in 2024-25. If other index providers like Bloomberg follow suit, it could bring an additional $10 billion of inflows.
• Lower Borrowing Costs: Increased foreign investment is likely to lower borrowing costs for the Indian government and businesses. This can stimulate economic growth by reducing the cost of capital.
• Economic Growth: The influx of foreign investment is expected to boost economic growth in India, creating more jobs and opportunities for businesses.
• Capital Market Development: Inclusion in the index is likely to promote the development of India’s capital market. This can make it easier for Indian businesses to raise funds and provide more investment options for domestic investors.
• Support for the Rupee: The inclusion could provide support for the Indian rupee as foreign investors purchase Indian bonds and hold assets in the local currency.
• Lower Bond Yields: Bond yields are expected to decrease due to inclusion in the index, making Indian bonds more attractive to investors.
• Improved Credit Rating: India’s sovereign debt rating may improve as a result of being included in a globally tracked index, potentially easing its access to international borrowing.
Challenges associated with this inclusion include the need for India to ensure its bond market remains sufficiently liquid to accommodate increased foreign investment. Additionally, increased integration into global financial markets could make India more susceptible to external financial shocks.
India’s inclusion in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) marks a pivotal moment for its economy. The gradual inclusion is anticipated to bring significant foreign investment, potentially up to $25 billion, and lower borrowing costs. This influx of capital is expected to spur economic growth, foster capital market development, support the rupee and reduce bond yields. It may also enhance India’s credit rating. However, India must ensure liquidity in its bond market and be vigilant about potential external financial shocks as it deepens its integration into global financial markets.