This article presents a comprehensive discussion on the recent inclusion of India in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) index. The narrative unfolds by defining the pivotal terms, detailing on the significance of the inclusion, illustrating its impact on various sectors and explicating the ensuing challenges.
JPMorgan GBI-EM Index: An Overview
The JP Morgan GBI-EM is a globally recognized index tracing the performance of Sovereign Bonds issued in local currency by emerging market nations. It offers an illustrative measure of the fixed income market within these economies. This index includes government bonds from several emerging market countries and its composition varies due to eligibility criteria.
India’s Inclusion in the Index
In 2024, JPMorgan will incorporate 23 Indian government bonds with a combined nominal value of USD 330 billion into the GBI-EM. Consequently, India’s weight is projected to reach 10% in the GBI-EM Global Diversified and around 8.7% in the GBI-EM Global index. Indian bonds will now be a part of the index series that serves as benchmarks for approximately USD 236 billion in global funds.
Significance of India’s Inclusion in GBI-EM Index
India’s integration into this index could potentially attract significant capital flow into the country over the next year, amounting to approximately between USD 45-50 billion. This will not just enhance India’s investment attractiveness, but also provide solutions to financing constraints related to the fiscal and current account deficits. The entry is expected to lead to a reduction in the yield curve thereby lowering financing costs for the corporate sector, and enabling banks to devote more resources for private sector lending.
Implications on Various Sectors
Several sectors are likely to feel the positive impact of this inclusion. The corporate sector will benefit from reduced financing costs, banks can allocate more lending resources to the private sector while ongoing infrastructure development initiatives will receive a boost due to sustainable source of long-term financing. The Indian rupee may appreciate due to heightened investor confidence leading to currency stability and potentially fostering market development and innovation.
The Parity Aspect
India is projected to reach a maximum weightage of 10 % in the GBI-EM Global Diversified Index. This places it on equal footing with countries like China, Brazil, Indonesia, and Malaysia.
Challenges Post-Inclusion
Despite the benefits, India’s inclusion in the index also comes with challenges. Increased volatility in local debt markets is a concern, especially during periods of global economic uncertainty. High foreign holding of debt exposes Indian markets to external macro-economic shocks and geopolitical risks. Additionally, the domestic currency’s value may be impacted, posing challenges in managing exchange rates. Moreover, the inclusion necessitates greater transparency and fiscal responsibility related to government finances. Unresolved tax treatment for foreign investors may deter potential investment, necessitating clarity and favorable tax policies.
A Way Forward
To mitigate these challenges, measures such as addressing operational hurdles related to custody, tax implications, and settlement, strengthening regulatory environment, enhancing economic fundamentals to withstand global fluctuations, and promoting transparency are crucial. This will facilitate smooth participation of foreign investors and ensure market integrity, investor protection, and long-term inflow of capital.
