(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Shritama Bose
MUMBAI, Sept 22 (Reuters Breakingviews) — A door to
fresh capital just opened for India. JPMorgan will add
the country’s government bonds to its emerging market index,
easing concentration issues resulting from Russia’s exclusion
following its invasion of Ukraine. The move drags foreign funds
deeper into a $1 trillion sovereign debt market. But New Delhi
may have to give an inch to win wider backing and fully unlock
other gains.
The influential index compiler’s move follows the Reserve
Bank of India’s 2020 decision to allow unfettered foreign
investment in a small pool of government bonds. Yet red tape and
lack of index inclusion have kept buyers away. Foreigners own
less than 3% of the $400 billion of bonds they are eligible to
buy under the window. That ratio will now increase.
For global funds tracking the index, India’s addition fixes
a concentration problem. Seven countries account for almost 70%
of JPMorgan’s GBI-EM Global Diversified index. India will be one
of three countries, instead of five, with a 10% weighting
alongside China and Indonesia at the expense of Mexico and
Brazil among others. If investors make their full allocation
over the 10-month period of inclusion through March 2025, India
will attract some $24 billion.
There are manifold benefits for the South Asian nation. Most
obviously, the government will be able to borrow for less:
India’s 10-year bonds yield about 7.1%, 260 basis
points above the equivalent tenure U.S. debt. The spread between
the two country’s treasuries dropped to a 17-year low
on Thursday’s announcement. New Delhi is also interested in a
much bigger prize.
Sanctions against Russia rekindled India’s desire to
internationalise its currency and relegated
the RBI’s longstanding wariness of hot money flows to the
backburner. A July report published by the central
bank supported bond index inclusion as a step towards pushing
global use of the rupee. India will need to work harder if it
wants to be welcomed into other major benchmarks investors
track, however.
Bloomberg’s Global Aggregate Index, for example, does not
suffer concentration issues because it also includes developed
markets. That means it has the luxury to wait for India to make
trading easier. Authorities have improved settlement times but
they may have to scrap the capital gains tax for offshore
investors. The immediate prize there for India is smaller, a
0.5% weight in that index would imply passive flows of around
$10 billion, per brokerage Emkay Global Financial Services.
India may yet bend, for now it can savour the moment.
Follow @ShritamaBose on X
JPMorgan on Sept. 21 said it would include India in its key
emerging market sovereign bond indices starting June 28. The
inclusion of the bonds will be staggered over a 10-month period
through March 31, 2025, taking the country’s weight in the index
to the maximum 10%.
The index compilers’ GBI-EM Global index suite will include
23 Indian government bonds with a combined face value of $330
(Editing by Una Galani, Katrina Hamlin and Streisand Neto)