India’s inclusion in the JPMorgan Chase & Co’s emerging-market bond index comes at a moment that China looks tired, Russia is no longer investible and other emerging markets face instability — all of which makes India that much more attractive.
The world’s fastest-growing major economy, which has the largest population on the planet, has never been fully connected to the global finance machine. But starting on Friday, June 28, foreign investors will gain access to a significant growth market — or at least one with massive potential — they have long craved.
For India, joining JPMorgan Chase & Co’s emerging-market bond index, hallowed territory for a certain Wall Street set, is a significant milestone — one that’s projected to attract billions in investment. Inclusion in the index comes at a moment that China looks tired, Russia is no longer investible and other emerging markets face instability — all of which makes India that much more attractive.
What to know
In general, inclusion in JPMorgan’s index reflects a certain confidence in India’s economic trajectory. In more practical terms, the event means foreign investors will finally gain access to India’s tightly-regulated $1.3 trillion government bond market. Global investment in the country’s debt could amount to as much as $40 billion in total due to the index inclusion, according to Goldman Sachs Group Inc.
Foreign inflows will help reduce the government’s dependence on domestic investors to fund borrowing needs, which should incentivize banks to deploy more capital to businesses and lower the cost of funding. Eventually India could get added into even bigger bond indexes such as FTSE Russell’s World Government Bond Index or Bloomberg’s Global Aggregate Index.
The backstory
Discussions about inclusion began a decade ago under India’s then-central bank governor Raghuram Rajan. But Indian policymakers have long cited risks from foreign flows impacting local interest rates in their reluctance to open up the country’s debt markets.
Renewed chatter began about five years ago, when Bloomberg LP offered to work with authorities on index inclusion. Then came the pandemic and the government’s need for more money to fund its record borrowing and stimulus. In 2020, the Reserve Bank of India (RBI) opened a wide swath of its sovereign bond market to foreign investors.
JPMorgan added India to its watchlist for inclusion in the emerging market bond indexes in October 2021. But talks hit a stalemate due to New Delhi’s reluctance to provide tax breaks to foreigners to trade on international platforms. What likely revived the matter was investors wanting diversification to compensate for China’s economic woes and sanctions on Russia. India hasn’t yielded to requests by foreign investors for tax breaks.
JPMorgan finally announced the addition in September 2023. The country is set to be the biggest entrant in the index after China got added in 2020. India will have a peak weight of 10% in the index, which is the maximum amount and similar to China’s weighting.
Bloomberg also subsequently said it will add the nation’s debt to its emerging markets index starting next year. (Bloomberg LP is the parent company of Bloomberg Index Services Ltd., which administers indexes that compete with those from other providers, and Bloomberg News.)
Economic backdrop
India joins the index from a position of strength, with GDP growth topping 8% in the most recent fiscal year. The nation has come a long way since 2013, when it was lumped together as part of Morgan Stanley’s “Fragile Five” — economies that are heavily reliant on foreign inflows and vulnerable to rising US interest rates.
The success of its services exports has helped narrow the external deficit, while forex reserves of $650 billion are the world’s fourth largest. The central bank’s focus on reducing inflation has also enhanced its credibility. S&P Global Ratings has suggested a potential ratings upgrade could happen within the next two years.
India could become the third-largest economy by 2027, surpassing Japan and Germany, while its stock market is expected to be the third largest by 2030, according to Morgan Stanley estimates. Nomura Holdings Inc. projects that global supply chain diversification will nearly double the nation’s exports to $835 billion by 2030.
Opportunities and risks
For global investors, Indian bonds offer access to a high-growth, high-yield market. According to JPMorgan, the securities have beaten their index counterparts over the past decade. Additionally, the rupee is among the least volatile emerging market currencies, which has enhanced the nation’s appeal.
Since JPMorgan’s September announcement, more than $10 billion has flowed into local bonds, with global funds such as BlackRock and Abrdn investing ahead of the actual inclusion. Morgan Stanley estimates that 3.6% of the total assets tracking the index are already deployed in India, reflecting a rush to gain exposure despite the elaborate documentation needed to set up onshore.
For India, inclusion represents a relatively stable source of global capital to help fund its infrastructure needs and aligns with Prime Minister Narendra Modi’s ambition to increase the nation’s global role. Efforts to internationalize the rupee by promoting its use in trade transactions as well as opening up the bond market are part of that aspiration.
This move is expected to enhance liquidity for local banks, enabling them to grow services like custodial operations and sell down holdings to new investors, freeing up capital. It is also expected to boost India’s private credit as well as corporate bonds markets.
However, there are risks, including volatility from sudden outflows during global risk-off periods, which can disrupt stock and currency markets. The RBI has been building foreign-exchange reserves to counter this.
Political stability is also a potential concern. While Modi recently secured a third term, his party lost its majority in the lower house of parliament and relies on two fickle allies. UBS Asset Management says that some investors may be overly confident about his ability to run a coalition government.
Egypt’s recent experience also serves as a cautionary tale. The country was added to the index in 2022, then removed in January 2024 due to a foreign exchange shortage.
Disclaimer: This article first appeared on Bloomberg, and is published by a special syndication arrangement.
