JP Morgan is adding India to its emerging-markets bond index

By Subhadip Sircar, Matthew Burgess and Ronojoy Mazumdar

JP Morgan Chase & Co will add Indian government bonds to its benchmark emerging-market index, a keenly awaited event that could drive billions of foreign inflows to the nation’s debt market. 

The decision is the latest sign of India’s growing appeal to international investors as the country’s economic growth outstrips peers, its geopolitical influence grows and global companies including Apple Inc. look for alternatives to China. While foreigners play a small role in the Indian bond market, inflows have been picking up in recent years and the country’s assets have proven resilient to financial turbulence that has roiled other developing-nations.

The index provider will add Indian securities to the JP Morgan Government Bond Index-Emerging Markets starting June 28, 2024. The South Asian nation will have a maximum weight of 10 per cent on the index, according to a statement Thursday. 

Index inclusion follows “the Indian government’s introduction of the FAR program in 2020 and substantive market reforms for aiding foreign portfolio investments,” the team led by the firm’s global head of index research, Gloria Kim, said in a statement. Almost three-quarters of benchmark investors surveyed were in favor of India’s inclusion in to the index, they said. 

Credit: Bloomberg Photo

India’s milestone is a stark contrast to many emerging-market peers, not least neighboring China, whose economic woes and struggling financial markets have become a source of frustration for global investors. In fact, those troubles have only burnished India’s appeal.

Foreign investors have bought $3.5 billion worth of Indian government debt this year, according to data compiled by Bloomberg. Giving global investors greater access may prompt flows of as much as $30 billion, according to HSBC Holdings Plc in a recent note.

On the equities side, India has been as one of the top investment destintions among major emerging markets this year, with its fast-growing economy and solid corporate earnings pushing the nation’s equity benchmark near an all-time high. Developing-market money managers are most overweight on India in their Asia portfolios, Goldman Sachs Group Inc. analysts wrote in a report earlier this month.

While concerns over rising oil prices and higher-for-longer US interest rates have spurred outflows from local shares in September, overseas investors have bought almost $16 billion on a net basis this year. That’s set to be the biggest annual inflow since 2020.  

“With inflation coming under control, the inclusion will open more gates for foreign capital to flow into India,” said Charu Chanana, a strategist at Saxo Markets in Singapore. 

Credit: Bloomberg Photo

Expectations that India may be added to international gauges had been rising in recent months as providers look to diversify index constituents. Russia’s invasion of Ukraine had seen it drop off indexes, while China’s worsening economic woes have taken the shine off the country’s sovereign debt.

That left India as the world’s last big emerging market that hasn’t joined others like China on the global debt indexes. Assets worth $236 billion track the JPMorgan emerging market bond indexes, the company said.

Still, authorities in India have been largely uncompromising in making changes to tax policies that would make it easier for the securities to be added to global indexes. Korea, another large emerging market, signed an agreement to open an omnibus account with Euroclear Bank SA, facilitating foreigners’ access.

Currently, 23 bonds worth a combined notional $330 billion are eligible to be added into the index, J P Morgan said. Inclusion will be staggered over 10 months at roughly 1 per cent weight per month, it said.

Foreigners have raised their holdings of such bonds to almost $12 billion, from $7.4 billion at end of 2022, in anticipation of the inclusion, according to Clearing Corp. of India data. The rupee was trading 0.4 per cent higher in offshore trading early Friday, with the bond market yet to start trading.

FTSE Russell, another major index provider, has the nation’s bonds on index watch for inclusion in its emerging market gauge.  

Elsewhere, Egypt has been placed on negative watch due to the material currency repatriation hurdles reported by investors, J P Morgan said. The country’s index eligibility will be assessed over the next three to six months, it said.