JP Morgan’s Bond Index And Indian Bond Inclusion – What It Is And What It Means In Simple Terms (Image: x.com/@jpmorgan)

The inclusion of India in JP Morgan’s bond index is a big momentum for the Indian bond markets. Let’s see, how and what it is about for India:

As a background, looking back at an India that was, and looking ahead at an India that is to become, one noticeable factor is that India, is a country that has always been ambitious. This can be seen manifested in the country’s growth and development – in building infrastructure and preparing the massive population for better living standards. This focus has been achieved through the economic strategies throughout ages, with the government pumping in money when and wherever needed, for the country’s momentum.

Now, the main receipts of the government are from the process of taxation, but this alone would not suffice to run a big nation, in that case, the government resorts to borrowing from investors. The government, along with the RBI, issues bonds, to raise money; the money received thus from the investors are later returned with a little more money as an extra topping for them. Now, this explains the case of the government funds, spending and investment; but the country also has a private sector which needs investments.

In such a scenario, a competition to lure the investors could take place, and the private players would only succeed if they have better prospects for the domestic investors of the land. This could become strained and draining. With this situation, if there could be more investors, it would be of help to both the government and private sectors or players. This is where the foreign investors steps in to the domestic playground which could add in more funds, more development, more growth and better performing sectors of the economy, which could in turn raise the country”s standards and credibility in the global financial ecosystem.

Foreign investors are allowed to invest in India, but the process always had restrictions – restrictions on the bonds that they could invest in, and control in the money that would flow from it – in terms of conversion of the money from dollars or other currencies into rupees and also restrictions in reinvesting in the country. This scene has now given way to a smoother way of conducting business in the last four to five years. The government now sees investments as opportunities which in turn could fan the ambitions of growth and development of the country.

Foreign investors, as a measure of safeguarding their money, invest in baskets of bonds in different countries. In this, they are guided by entities who have specialisation on the subject. These guiding entities track and report on the performance of bonds of countries across the world. This is where JP Morgan enters, the firm’s Emerging Markets Bond Index is such a basket crafted for investors to know where to invest.

JP Morgan, in their Emerging Markets Bond Index tracks the international government bond’s performance, which are issued by emerging market countries including India. India did not feature in their list earlier, as it did not adhere to the strict conditions chalked out by the firm, thus letting investors miss the opportunity to invest in India. In the last few years, the government of India has been working on such requirements to enter the list of investor guiding entities. As a part of this, the investment limits and tax regimes have been smoothened and simplified, along with other measures including promises and actions to promote foreign investors.

With the efforts seeing results, recently, 23 Indian Government Bonds with a value of about $330 billion have been included in the JP Morgan’s Emerging Market Government Bond Index. This inclusion will begin at a slow pace from June 2024, till they form 10 % of the total index, which would be after 10 months.

In a more simplified manner, this would catch the attention of foreign fund investors and they would begin to invest in Indian Government Bonds. The funds to the tune of $20 billion or more could flow into the country and if more entities like JP Morgan lists the Indian bonds, then more funds to come in allowing more development, growth and global standards.

On this Morgan Stanley wrote, “this could be a push-factor to prompt foreign inflows into India and foreign investors are likely to be more active in the Indian fixed income market.”

The JP Morgan”s Government Bond Index-Emerging Markets (GBI-EM), which was launched in 2005 June is the first comprehensive global local emerging markets index. It keeps a track of the local currency bonds of the emerging market governments.

The big move comes with challenges too though the benefits of this would be seen later tumbling across sectors. Some benefits that could come out of this are that, borrowing by the government would be made smooth along with the funds availability for the private players, which would also be smooth and easily available. The rupee’s value could increase with its demand going up as it gets exchanged with other currencies. And finally, the Indian bonds could make an entry into other global indexes, attracting more investments. The flip side of this is that the influx of foreign capital would be something that the government and the RBI will have to manage. The foreign capital could rush in and at the same time rush out with the same speed, this could be a tricky situation.

(With inputs from business-standard.com, bqPrime.com and finshots.in)