India set to join JPMorgan’s pivotal bond index

JPMorgan is probing major investors to add India to its widely followed emerging markets bond index, paving the way for tens of billions of dollars in inflows as the country’s domestic market opens to foreign capital.

The Wall Street bank is seeking investors’ views on whether to make a large chunk of India’s Rs$1 billion-dominated bond market eligible for inclusion in the GBI- EM Global Diversified local currency debt, according to two people familiar with the matter. It opened the consultation this summer with fund managers representing 85% of the $240 billion in assets under management tracking the benchmark.

A move to add Indian debt to one of the bank’s flagship indices would mark an inflection point for global investors’ exposure to the world’s fifth-largest economy and the culmination of years of talks between the Indian government, index providers and investors.

The consultation with asset managers comes as a growing number of investors and analysts are tipping Indian sovereign bonds for inclusion in the influential benchmark, a move that would result in around $30 billion. dollars inflow from passive investors, according to Goldman Sachs.

“We think there is now momentum on the investor side for inclusion,” said Jayesh Mehta, India treasurer at Bank of America. The Indian government’s mistrust of speculative capital flows – which can quickly move in and out of markets – has also been assuaged, Mehta added. “The government has been persuaded that index-based funds are stickier.”

Danny Suwanapruti, head of Asia’s emerging markets currency and rates strategy at Goldman, added that “it’s a win-win situation for everyone if they can make it work and the incentives are better now. lined up for that to happen, so it becomes a matter of time.”

Suwanapruti predicts that around $270 billion of so-called fully accessible sovereign bonds traded in the Indian local market will become eligible for the GBI-EM index by 2023, and that the country will represent around one-tenth of the benchmark. global when included. “It would bring about $30 billion in passive inflows . . . help India finance its fiscal and current account deficit,” he said.

JPMorgan’s consultation is expected to be completed by next month, with the announcement of a formal proposal expected in October, according to people familiar with the matter. The bank declined to comment on the potential inclusion, as did India’s finance ministry.

India is not included in most other major bond indices, such as Bloomberg’s Global Aggregate Index or the FTSE Emerging Markets Bond Index.

FTSE Russell placed Indian government bonds on a watchlist for possible inclusion in early 2021, but said in March that status remained unchanged – although another assessment is due next month. FTSE Russell declined to comment on India’s rating status.

The Reserve Bank of India introduced a fully accessible route, or FAR bonds in March 2020, allowing foreign financial institutions to invest in rupee-denominated bonds without restrictions for the first time. It is on this subset of GOI FAR bonds that JPMorgan’s consultation focuses.

Line chart of year-to-date inflows (in billions of dollars) showing that inclusion in the index should support inflows into the Indian bond market

The prospect of foreign inflows has become more attractive in New Delhi since the start of 2020. Although India has not splurged on coronavirus stimulus measures as forcefully as other major economies, its budget deficit has reached record levels during the pandemic, accentuating the need to expand its financing options. “After the Covid, our deficit reached such a level that financing it only at the national level has [negative] implications,” said a Mumbai-based senior banker.

One of the major stumbling blocks in previous inclusion campaigns has been where and how bond trading should be settled – whether outside India’s borders on a platform like Euroclear that is familiar to global financial institutions, or in India, where investors would have to complete onerous registration procedures.

According to three experienced Indian bankers familiar with the talks, the offshore settlement option actually ran out of the Indian government’s veto last year due to problems with the administration of capital gains tax, which would have disadvantaged Indian investors.

Goldman’s Suwanapruti said the lack of settlement on a global platform was unlikely to derail the process, as it had not prevented the inclusion of China or Indonesia. He added that while the time required to open a trading account in India would be “burdensome” for foreign investors new to the market, a longer time frame for inclusion in the benchmark could help solve this problem. .

Despite growing expectations from much of the market for imminent inclusion, some bankers expressed doubts that approval would come so quickly.

“I think September would be too aggressive [for index inclusion], my feeling is maybe early next year,” said a senior banker. Opinions also differ on the immediacy of investor demand for India’s inclusion, especially with rising interest rates in developed markets.

Another senior banker said: “Given the size of the Indian market and the Indian economy, there is a certain view from investors that, listen, you have to find a way to bring India in.[to the indices]. . . but not necessarily today. In the medium term, I think there is enough investor sentiment.

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