India rates: India inclusion in GBI-EM

FAR bonds to be included in index.
Group Research, Radhika Rao22 Sep 2023
    Photo credit: Unsplash/Adobe Stock Photo

    After much speculation, JP Morgan Chase & Co. has announced plans to add the Indian government bonds to its Emerging Markets Bond index in 2024. The country’s securities will climb to a maximum weight of 10% in the GBI-EM Global Diversified index, and ~8.7% in the GBI-EM Global index. The process will extend over 10 months from Jun24 with 1% increments on its index weighting, till it likely reaches 10%. The authorities move to introduce FAR securities (Fully Accessible Route), free of ceilings for foreign investors, back in 2020 coupled with more reforms to spur portfolio inflows, likely moved the needle for the provider. Concurrently, demand amongst the benchmark investors was also reportedly high to include India in the index. For now 23 government bonds with a combined notional value of $330bn are eligible. We had noted in India: Optimism over bond index inclusion resurfaces a final 10% weightage in the JPM index could draw $25-30bn into India after the inclusion is complete. 

    Rising expectations of this move had supported INR bonds this week, leaving the 10Y yield steady even as UST rates climbed to an 16y high. The outcome of the review by the FTSE Russell index is pending next. In the run-up to the review, few catalysts had revived expectations of such a move; a) Russia’s exclusion from the index last year and the consequent reweighting exercise provided a window for India’s inclusion; b) one of the JPMorgan bond indices (GB-EM Global 10/1 index) was to provision/ account for the impact of withholding taxes on earned interest on international investors (press). This smoothened a hurdle between the government and the index provider, with concessions of the capital gains tax under watch next; c) the RBI reportedly sought market participants’ feedback about settlements on the Euroclear platform. These hopes had pushed up foreign interest in bonds available under the FAR (Fully Accessible Route) to a record high as of mid-Sep23. This announcement is a significant positive for the INR bond in the short-term as investors look to front-run the eventual inclusion. We are also mindful of the gestation period between the announcement and the actual inclusion when the material boost from passive index funds will materialize. 


    Radhika Rao

    Senior Economist – Eurozone, India, Indonesia

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