JP Morgan said it will include 23 Indian government bonds – worth around $330 billion – in its index, starting 28 June 2024. India will have a maximum 10% weight in the index.
We think this will strengthen India’s global ambitions. The Bloomberg Barclays Global Aggregate Index (with some $4 trillion in assets tracking it) is also considering India for inclusion. Given today’s momentum, we think this will be sooner rather than later.
What will this mean for India?
Inclusion on the JP Morgan Index should bolster sentiment for both foreign exchange and bonds. This will help India finance its fiscal position, expand the ownership base of its bonds and enhance liquidity. Greater investor scrutiny could also focus Prime Minister Modi’s attempts to whittle down the nation’s deficit. A downside of all of this, however, will likely be increased volatility, especially if we see a macro upset.
Generally, we expect investors to get ahead of the curve and start allocating to the asset class before the official mid-2024 inclusion date. There are around 150 emerging-market local currency funds in the Morningstar category. There will be a scramble for these to complete the challenging registration process.
As soon as accounts are approved, they will likely start building positions. That could be as soon as four-to-six months from now for the non-passive emerging-market funds. Given the potential for Indian bonds, we think many investors will want to hold overweight positions.
The case for Indian bonds
The performance numbers speak for themselves. Over the last 10 years, the iBoxx India local currency index delivered an 86% return in US dollars, as at the end of August 2023 [1]. That’s higher than emerging- and Asian-equity markets. It also outstrips the global aggregate bond market, as well as broader emerging-market debt.
Meanwhile, the Reserve Bank of India has built an enormous war chest of foreign exchange reserves of around $600 billion, some of the highest in the world. It uses these to manage rupee volatility, which is close to an 18-year low of 3.4%. That’s much lower than G10 and emerging market foreign-exchange volatility, and the lowest in Asia.
Indian inflation peaked in 2022 and has been steadily declining. This has allowed the Reserve Bank of India to keep rates on hold since February. Food inflation is already easing, thanks to improving rainfall and the conclusion of the harvest season. The consumer price index fell from 7.4% in July to 5% in September. We think inflation will hit 4.5% next year, thanks to strong base effects. This should allow the central bank to cut its policy rate by as much as 100 basis points in 2024.
Committed reform agenda
Perhaps the biggest attraction is the government’s commitment to its reform agenda. Highlights include the easing of restrictions on foreign investment and bankruptcy laws. Meanwhile, the Goods and Services Tax has created a common market across all 36 union states. This resulted in enhanced internal trade efficiency, as well as supporting revenue growth and fiscal consolidation. Competitive federalism, whereby individual states have more autonomy over policy, has increased focus on local competition. This reduces waste and improves resource allocation.
Arguably, India's single-most fruitful policy is its comprehensive digital ecosystem. This includes Digital Public Infrastructure, a collection of public-facing digital platforms that are enhancing many sectors of the economy. The benefits are considerable. For example, according to the International Monetary Fund, digitally linked bank accounts drastically cut losses from corruption by US$34 billion, or over 1% of India's gross domestic product, between 2013 and March 2021. There are additional benefits in areas like e-commerce, expanding banking and credit access, and fostering innovation.
A final benefit lies with China. Growing tensions with the US have resulted in the world’s largest economy pivoting towards India. Among notable areas of cooperation are technology and the transition to clean energy. Both are key growth drivers for India, where it can leverage the US’s vast know-how, capital strength and direct patronage.
Investment implications
We believe the strengthening Indian economy and ongoing reforms will continue to support credit fundamentals. In turn, growing confidence in its ability to manage key risks creates a receptive environment for foreign investors. JP Morgan’s decision to include India in its benchmark index will further drive inflows.
For investors, increasing accessibility means enhanced diversification and exposure to a relatively stable, high-yielding and large bond market of a fast-growing country that has consistently outperformed for many years.
[1]abrdn, Bloomberg, August 2023
JP Morgan said it will include 23 Indian government bonds – worth around $330 billion – in its index, starting 28 June 2024. India will have a maximum 10% weight in the index.
We think this will strengthen India’s global ambitions. The Bloomberg Barclays Global Aggregate Index (with some $4 trillion in assets tracking it) is also considering India for inclusion. Given today’s momentum, we think this will be sooner rather than later.
What will this mean for India?
Inclusion on the JP Morgan Index should bolster sentiment for both foreign exchange and bonds. This will help India finance its fiscal position, expand the ownership base of its bonds and enhance liquidity. Greater investor scrutiny could also focus Prime Minister Modi’s attempts to whittle down the nation’s deficit. A downside of all of this, however, will likely be increased volatility, especially if we see a macro upset.
Generally, we expect investors to get ahead of the curve and start allocating to the asset class before the official mid-2024 inclusion date. There are around 150 emerging-market local currency funds in the Morningstar category. There will be a scramble for these to complete the challenging registration process.
As soon as accounts are approved, they will likely start building positions. That could be as soon as four-to-six months from now for the non-passive emerging-market funds. Given the potential for Indian bonds, we think many investors will want to hold overweight positions.
The case for Indian bonds
The performance numbers speak for themselves. Over the last 10 years, the iBoxx India local currency index delivered an 86% return in US dollars, as at the end of August 2023 [1]. That’s higher than emerging- and Asian-equity markets. It also outstrips the global aggregate bond market, as well as broader emerging-market debt.
Meanwhile, the Reserve Bank of India has built an enormous war chest of foreign exchange reserves of around $600 billion, some of the highest in the world. It uses these to manage rupee volatility, which is close to an 18-year low of 3.4%. That’s much lower than G10 and emerging market foreign-exchange volatility, and the lowest in Asia.
Indian inflation peaked in 2022 and has been steadily declining. This has allowed the Reserve Bank of India to keep rates on hold since February. Food inflation is already easing, thanks to improving rainfall and the conclusion of the harvest season. The consumer price index fell from 7.4% in July to 5% in September. We think inflation will hit 4.5% next year, thanks to strong base effects. This should allow the central bank to cut its policy rate by as much as 100 basis points in 2024.
Committed reform agenda
Perhaps the biggest attraction is the government’s commitment to its reform agenda. Highlights include the easing of restrictions on foreign investment and bankruptcy laws. Meanwhile, the Goods and Services Tax has created a common market across all 36 union states. This resulted in enhanced internal trade efficiency, as well as supporting revenue growth and fiscal consolidation. Competitive federalism, whereby individual states have more autonomy over policy, has increased focus on local competition. This reduces waste and improves resource allocation.
Arguably, India's single-most fruitful policy is its comprehensive digital ecosystem. This includes Digital Public Infrastructure, a collection of public-facing digital platforms that are enhancing many sectors of the economy. The benefits are considerable. For example, according to the International Monetary Fund, digitally linked bank accounts drastically cut losses from corruption by US$34 billion, or over 1% of India's gross domestic product, between 2013 and March 2021. There are additional benefits in areas like e-commerce, expanding banking and credit access, and fostering innovation.
A final benefit lies with China. Growing tensions with the US have resulted in the world’s largest economy pivoting towards India. Among notable areas of cooperation are technology and the transition to clean energy. Both are key growth drivers for India, where it can leverage the US’s vast know-how, capital strength and direct patronage.
Investment implications
We believe the strengthening Indian economy and ongoing reforms will continue to support credit fundamentals. In turn, growing confidence in its ability to manage key risks creates a receptive environment for foreign investors. JP Morgan’s decision to include India in its benchmark index will further drive inflows.
For investors, increasing accessibility means enhanced diversification and exposure to a relatively stable, high-yielding and large bond market of a fast-growing country that has consistently outperformed for many years.
[1]abrdn, Bloomberg, August 2023