India Inclusion in JP Morgan EM Bond Index

What’s in today’s article?

• Why in News?
• Indian Bond Market - Challenges and Solutions
• What is the JP Morgan Emerging Market Index?
• What was JP Morgan’s Announcement?
• Impact of IGBs Inclusion
• Will Higher Inflows be a Concern for RBI?

Why in News?

• India officially became part of JP Morgan's Government Bond Index-Emerging Markets (GBI-EM).
• The inclusion is likely to bring nearly $20-25 billion into the country (over the next 10 months) and will help India manage its external finances and boost foreign exchange reserves and the rupee.

Indian Bond Market - Challenges and Solutions:

• Importance of bond markets:
  • They are a boon for corporate bodies and government entities, providing a flexible and efficient way to raise capital.
  • One of the critical advantages for companies is the avoidance of equity dilution.
  • Moreover, the cost of capital is reduced as the interest expenses on debt instruments are tax-deductible, making it a more attractive option than other forms of financing.
• India's bond market:
  • India's bond market is pivotal in the country's economic structure.
  • As of September 2023, the government bond market size stands impressively at $1.3 trillion, with corporate bonds at $0.6 trillion.
• Challenges in Indian bond markets:
  • Narrow investment base,
  • Insufficient participation by foreign investors,
  • Virtually absent secondary market and
  • Private placement (a sale of stock shares or bonds to pre-selected investors and institutions rather than publicly on the open market).
• Panacea:
  • Inclusion in the Global Indices
  • Presence of market makers on both buy and sell-side
  • No credit default swaps
  • Bonds bhi ‘Sahi Hain’: A marketing campaign which can catch the eyeballs of all the age groups of the society.
  • Credit enhancement frameworks
  • Incentivising the issuer

What is the JP Morgan Emerging Market Index?

• Created in the early 1990s, it is the most widely referenced index for emerging market bonds and has become benchmarks for local market and corporate EM bonds.
• It began with the issuance of the first Brady bond - denominated in U.S. dollars and issued by developing countries and backed by the U.S. Treasury bonds.
• It has since expanded to include the GBI-EM (in 2005) and the Corporate Emerging Markets Bond Index (CEMBI).

What was JP Morgan’s Announcement?

• JP Morgan has announced that it would include Indian Government Bonds (IGBs) to its emerging markets bond index (starting June 28, 2024).
• There are 23 IGBs that meet the index eligibility criteria, with a combined notional value of approximately Rs 27 lakh crore or $330 billion.
• Only IGBs designated under the Fully Accessible Route (FAR was introduced by the RBI in 2020 to enable non-residents to invest in specified Government of India dated securities) are index-eligible.

Impact of IGBs Inclusion:

• India is expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD).
• A higher weightage will prompt global investors to allocate more funds (~ $ 2-3 billion flows to India every month) for investment in Indian debt.
• It will not only result in lower risk premia, but will also help India to finance its fiscal and current account deficit (CAD).
• It will also help India to enhance the liquidity and ownership base of government securities (G-secs; debt instruments issued by the central government to meet its fiscal needs).
• The inclusion of certain Indian sovereign bonds will support a diversification of the investor base for Indian government securities.
• It could help lower funding costs slightly, and support further development of domestic capital markets.

Will Higher Inflows be a Concern for RBI?

• When the Reserve Bank of India (RBI) removes dollars from the market, it must release an equal amount in rupees.

● This means, while higher inflows will boost the rupee, the RBI will have to use the instruments in its armoury to check the resultant inflationary pressures

Q.1. What is fiscal and current account deficit (CAD)?

While both CAD and fiscal deficit relate to a country's financial health, they operate in different spheres. CAD focuses on the trade balance between a country and the rest of the world, while fiscal deficit pertains to the government's budgetary situation.

Q.2. What do you mean by the credit default swap?

A credit default swap (CDS) is a contract between two parties in which one party purchases protection from another party against losses from the default of a borrower for a defined period of time.

Source: Indian govt bonds now part of JP Morgan's bond index. Here's what it means | IE