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Indian Government Bonds (IGBs) are set to be included in JP Morgan’s Government Bond Index - Emerging Markets (GBI-EM) on 28th June 2024. This inclusion was announced in September 2023. Since then the IGBs have seen inflows of FPIs approximating $10 Billion.
Why is this inclusion such a big deal?
This inclusion is a milestone achievement as it reflects India's growing importance in global financial markets and also demonstrates a positive and stable outlook on the Indian Government.
This will ensure more participation in the Indian Debt Markets, in turn diversifying methods for GOI to borrow from different sources, rather than the limited domestic pool of investors.
The IGBs inclusion is supposed to happen over the course of 10 months, the initial weightage held would be 1% in June 2024, steadily increasing over the next 10 months up to 10%, by March 2025.
Goldman Sachs estimates at least $30 billion more of flows in coming months as India’s weightage in the index steadily rises to 10 per cent.
These inflows will help India manage:
● External finances
● Boost foreign exchange reserves
● Support the rupee
● Lower funding costs for the Indian government
● Support further development of the domestic bond market
However, the Reserve Bank of India will need to manage any resulting inflationary pressures.
The index inclusion-related heavy flows are likely to boost demand for Indian government securities and have put downward pressure on the 10 Yr G-sec yields:
IGBs issued by RBI under the Fully Accessible Route (FAR) are supposed to be included in the index. JP Morgan has identified 23 such IGBs.
Only the IGBs issued by the Reserve Bank of India (RBI) under the Fully Accessible Route (FAR) will be included in the indices.
JP Morgan identified 23 Indian government bonds.
The Fully Accessible Route (FAR) is a channel that allows non-resident investors to invest in certain government securities without restrictions.
With this inclusion, the bond markets would gain better liquidity, which would also prompt more domestic retail participation.
In this era of India’s fin-tech revolution, there are more emerging startups and companies like Wint Wealth, India Bonds, Fixed Income.com, and Bonds India, that act as key players in educating and facilitating retail participation in bond markets. SEBI has also reformed norms for such platforms to regulate them, whilst maintaining ease of transactions.
The index inclusion is a testament to the significant reforms India has implemented in recent years to improve accessibility and liquidity for global investors. Measures such as the Fully Accessible Route for government bonds have made IGBs more attractive to international fund managers.
Looking ahead, the sustained demand from index funds is expected to support the Indian government bond market. The inclusion also enhances India's profile as an attractive investment destination and could lead to further inflows as global investors gain greater exposure to Indian assets.
Overall, the IGB inclusion in the GBI-EM Global Diversified Index is a positive development that underscores India's growing importance in the global financial system. It represents another step in the country's journey towards becoming a major player in international capital markets.
Thank you.
Regards,
Kautilya, IBS Mumbai.
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