Article on ‘Explainer: How JPMorgan’s Decision to Include Indian Government Bonds Affects India.’ by Adwait Venkitachalam, Director, Bizsolindia Financial Services Pvt Ltd. (October 2023)

JP Morgan Chase & CO, the US-based financial services behemoth, announced late September, 2023 that they had decided to include certain Indian Sovereign Bonds in its Global Bond Index – Emerging Markets (GBI-EM) Index starting 28th June 2024.

This inclusion would commence in a staggered manner, with 1% incremental weightage considered for each consecutive month, bringing the total weight of Indian Government Debt to 10% over 10 months.

This is certainly good news for India and particularly for the Indian Central Government. Though talks regarding the inclusion of these Bonds in the Index had started about a decade ago in 2013, India’s restrictions on foreign investment in domestic debt curtailed such an action in the past. In April 2020, India decided to remove all restrictions for a pool of 23 securities which would be eligible for foreign investments through a Fully Accessible Route (FAR).

Let us see what is the likely upside of this decision by the US firm for India. For starters, this inclusion could result in USD 21-22 billion worth of passive inflows in just a 10-month period. These inflows could be even higher if other indices decided to follow suit, which is currently under consideration. Compare this to the current foreign investment in Indian debt, which stands at a measly USD 3 billion so far this year.

Another benefit, though small, is that the foreign investments in these securities would help diversify the investment base of Indian sovereign debt, which would reduce dependency on domestic financial institutions, freeing them to better fund the private sector. This could also help lower rates slightly.

India’s fiscal deficit target of 5.9% of GDP, though lower than previous years, remains still high, resulting in the Government needing to borrow about USD 181 billion. New inflows of USD 22 billion would help decrease the fiscal deficit of the country.

Similarly, increased inflows in government debt from next year would allow India to better finance its current account deficit and reduce some of the pressure on the Indian Rupee as well.

A shrinking of both fiscal & current account deficit would only improve the creditworthiness of the country, thereby attracting further investments from international investors, both passive and active.

Playing the devil’s advocate for a minute here, I would like to add that although diversification in investment base is good to reduce risk, foreign investments could also increase the volatility in the Bond and currency markets, opening them up to international sentiments and prevailing global market conditions.

To conclude, though the benefits of this announcement do outweigh the downsides, take it with a pinch of salt. As the process begins only next year the expected benefits for India will accrue at a somewhat slower pace.



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