India’s inclusion in JP Morgan Global Bond Index: poised to attract $25 billion inflows

After nearly a decade from initial talks (2013), India is set to be a part of GBI-EM Global Index starting June 28, 2024. India’s inclusion in the index is expected to reach a maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD). The inclusion will be staggered over 10 months, with a 1% increase in weightage each month. This is expected to lead to passive inflows of around $(25-30) billion. 

The bonds that will be included in the index are rupee (INR) denominated, so the currency risks are minimal for foreign investors. The inclusion of India in the index is currently applicable through 23 Indian government bonds with a combined value of $330 billion. According to a report from Goldman Sachs, this move has the potential to trigger approximately $30 billion in passive inflows during the scale-in period, which includes emerging market local dedicated funds and blended funds, as a one-time stock adjustment.

Nevertheless, considering India’s appeal in terms of yield and relatively lower volume, it has the potential to draw in an additional $10 billion in active flows. Therefore, the Goldman Sachs report suggests that, in total, India’s fixed income markets could potentially witness inflows surpassing $40 billion over the next 18 months, with the phase-in period expected to conclude by March 2025. The report also notes that since several dedicated emerging market funds have already established positions in India, the inflows are likely to commence immediately as investors proactively position themselves for the anticipated inclusion next year.

Indeed, a natural inclination exists for the currency to appreciate, mirroring the period between late 2002 and early 2008 when capital inflows into India soared. Consequently, when there is investor demand for Indian government bonds denominated in rupees, it naturally bolsters the demand for the rupee. Assuming all other factors remain constant, this heightened demand has the potential to result in a nominal appreciation of the rupee.

The Reserve Bank of India (RBI) has been actively collaborating with various index providers, such as FTSE Russell and Bloomberg-Barclays, to facilitate the incorporation of Indian Government Bonds (IGBs) into global bond indices. With the successful inclusion in the JP Morgan EM Bond Index, India’s prospects for being added to the Bloomberg Global Aggregate Index have also significantly improved.