India bonds: index inclusion
- On 21 September 2023, JPMorgan announced that it would be including 23 India government bonds with a total notional value of USD 330 billion in its emerging market indices, including EMBI, GBI-EM and CEMBI series
- The inclusion will occur over a period of 10 months from 28 June 2024 through to 31 March 2025 and could likely bring USD 20-22 billion of inflows into the India bond market
- The index weighting of India bonds is expected to reach a maximum weight of 10 per cent in GBI-EM Global Diversified Index
- Following this announcement, we could see a further rally in INR fixed income assets. We see an increasing likelihood of a potential upside for the INR in the coming months, amidst the expectation of broad USD softness and the Reserve Bank of India’s ample FX reserves
- India government bonds can provide global bond portfolios with important diversification benefits given their low correlation of only 0.10 with global government bonds
- India government bonds have meaningfully outperformed both emerging market and global government bonds in the last 5-year and 10-year periods .
India bonds’ inclusion in JPMorgan emerging market indices
What is happening?
- On 21 September 2023, JPMorgan announced that it would be including India government bonds in its emerging market indices, including EMBI, GBI-EM and CEMBI series
- The inclusion will occur over a period of 10 months from 28 June 2024 through to 31 March 2025, at the inclusion rate of about 1 per cent weight per month
What will change?
- The index weighting of India bonds is expected to reach a maximum weight of 10 per cent in GBI-EM Global Diversified Index, 8.7 per cent in the GBI-EM Global Index and 14.59 per cent in the GBI-EM Global Diversified IG 15 per cent Cap Index. Other indices will also see changes (see Figure 2)
- Some markets within the emerging market indices will see a reduction in index weight (see Figure 1)
What is eligible to be added?
- Starting on 28 June 2024, 23 Indian government bonds, worth a total notional value of USD 330 billion, will be eligible for index inclusion
- On 28 June 2024, FAR-designated1 Indian government bonds with a maturity date after 31 December 2026 would be assessed for index eligibility, while new eligible FAR-designated Indian government bonds issued during the inclusion period would also be included
Fig. 1: GBI-EM Global Diversified Index - weight projections after the end of India bond inclusion
Source: JPMorgan, 21 September 2023
Fig. 2: Weight projections of JPMorgan emerging market indices after the end of India bond inclusion
Source: JPMorgan, 21 September 2023
Impact of bond inclusion
- We could see a further rally in INR fixed income assets following the announcement by JPMorgan to add India government bonds into its widely tracked emerging market indices
- We have seen recent outperformance of FAR government bonds in the last couple of weeks as investors have been positioning for the inclusion announcement. Nevertheless, there should still be room for a moderate yield decline of government bonds given there is no change in the macro backdrop
- We see an increasing likelihood of a potential upside for the INR in the coming months, with the expectation of broad USD softness and the central bank’s ample FX reserves, which is currently at USD 594 billion
- The INR should also have better support with the positive market sentiment arising from the index inclusion announcement
- INR internationalization should get a boost from index inclusion
- Over the longer term, we expect India bonds’ yield advantage to drive larger global allocations. India’s 10-year government bonds yield 7.2 per cent, while its US and China counterparts yield 4.5 per cent and 2.7 per cent respectively2
- Despite it being a large and liquid market, India bonds have not previously been added to any major global or emerging market indices. JPMorgan’s announcement marks a first. The inclusion period could likely bring USD 20-22 billion of inflows into the India bond market
- India bonds are also being considered for inclusion in other major indices, including in FTSE Emerging Markets Government Bond Index, where they are currently placed on the watch list
- We believe index inclusion is the right direction for the India bond market and yet another testament to the value the asset class brings to a global portfolio
Fig. 3: The Indian Rupee has performed decently against other G10 and Asian currencies
Source: JPMorgan, 21 September 2023
Diversification benefits of India bonds
- India government bonds, as measured by the Markit ALBI India Unhedged USD Index, have largely outperformed both emerging market government bonds (JPM GBI-EM Global Diversified Unhedged USD) as well as global government bonds (FTSE WGBI USD)
- Correlation between India bonds and global bonds over the last 5 years has been low at only 0.15 and even lower over the last 10 years at only 0.10, strengthening the case for India bonds as a diversifier for global portfolios3
- Correlation between India bonds and emerging market bonds over the last 10 years is 0.293
Fig. 4: India government bonds have largely outperformed both emerging market and global government bonds
JPM GBI-EM GD Unhedged USD refers to JPM GBI-EM Global Diversified Unhedged USD Index. Source: Markit, JPMorgan, FTSE, 21 September 2023
Note 1: FAR refers to Fully Accessible Route, introduced in 2020, whereby Foreign Portfolio Investor (FPI) limits are not imposed on certain government securities.
Note 2: Source is Bloomberg as of 21 September 2023.
Note 3: Source is Markit,, JPMorgan, FTSE, 31 August 2023
Source: HSBC Asset Management, JPMorgan, Bloomberg, September 2023.
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