Friday, June 28, is a landmark day in the financial journey of India since it flags off the process of inclusion of the country in the JP Morgan GBI-EM Global Series of indices. While the inclusion will be spread over 10 months, Government of India bonds will find a place in this emerging market index and will hold a maximum 10% weightage beginning with 1% in June.
While that’s certainly a matter of prestige for the country, the moot point is what economic benefits will it bring to the country.
Big inflow
After Indian bonds are included in global indices, they help pull more and more investments to Indian bonds from around the world. For example, experts think placing India in the JP Morgan index will attract about $25-30 billion into the country. Some think the amount will rise in the next few years.
The JP Morgan Government Bond Index- Emerging Markets was launched in June 2005. It is a global emerging markets index tracking local currency bonds issued by different emerging market governments.
A note from JP Morgan reportedly stated that the step will also raise EM Asia’s weight in the GBI-EM index too.
Impact on Indian rupee
The significant point is when foreign investors purchase Indian bonds, they have to first convert their currency to Indian rupees. This has a direct implication – it will increase the demand for India’s currency. Therefore, at one level, it could help the rupee become strong against the dollar.
Incidentally, on June 27, just the day before India’s inclusion in the index, the INR jumped 13 paise to close at 83.44 against the US dollar.
Free up resources
Experts also point out that increased demand for Indian bonds could raise their prices and thereby lower the yields. They also say that this entire process can result in a lowering of the cost of capital since the government would have more money for investment and that could come at relatively lower rates.
This is perhaps the most significant point. It could make cheaper capital available to both businesses and the government. In turn, it could lead them to invest in asset creation that could spur economic growth in the country. Interest rates might also inch down.
“We (India) have typically favoured FDI (foreign direct investment) and FPI (foreign portfolio investment) flows into equity and somehow thought that FPI flows into bonds is ‘a bad thing’. Now that perception is changing and we are finding another avenue to fund this saving-investment gap, which technically should mean that structurally we should be looking at a lower interest rate to bridge this saving-investment gap,” Samiran Chakraborty, chief economist of Citi India, was quoted as saying.
“If more foreign funds flow into these bonds, they will free up domestic funds that can be employed elsewhere by domestic businesses. These assets can be directed towards more efficient deployment,” said Nilanjan Dey, director of Wishlist Capital.
A Reuters report earlier this month has stated that foreign investors have already bought more than $10 billion worth of Indian government bonds in the run-up to the country’s inclusion in the index on June 28.
Stability of INR
However, there is a catch. While making investment decisions in Indian bonds, foreign investors are likely to keep an eye on the stability of the INR. This is because projected high yields from Indian markets could go down for investors abroad if the rupee is not stable.
“Investors from different currencies, like the Singapore dollar or euro, benefit particularly as a stable rupee can lead to currency gains on top of bond yields,” Kenneth Akintewe, who heads Asian Sovereign debt at global investment company Abrdn told CNBC TV18.
The Indian debt market is among the largest ones in the emerging markets. The total amount of outstanding bonds is more than $400 billion. Only the Chinese bond market is bigger than the Indian one.
The bonds that come under the Fully Accessible Route are eligible for inclusion in this index. There are 27 such Indian bonds in this category.
India in JP Morgan bond index: India’s inclusion in this index could mark a huge inflow of foreign funds into government debt paper. It would free up domestic funds for businesses. Markets Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
