A welcome development

The inclusion of India’s sovereign bonds in JP Morgan’s emerging market index is a recognition of the maturation and importance of the country’s financial markets. This was not unexpected as India had tried for this since 2013 and has been on the Index Watch Positive for inclusion since 2021. The exclusion of Russia and the strain in relations between China and western countries may have hastened the decision. The inclusion in the index will lead to inflow of funds on a large scale and help the markets to acquire greater depth. The entry will be staggered over 10 months from June 2024 to March 2025, increasing by 1 per cent every month. There will be a maximum weightage of 10 per cent for Indian bonds, on par with bonds from China, Brazil, Indonesia and Indonesia. An inflow of $20-30 billion is estimated. Other major indices could follow the JP Morgan decision.

The capital inflow into the market will provide the government with another source to finance its fiscal and current account deficits. It can also lower borrowing costs for the government. The bond market is likely to become stronger. There will be greater cushion against higher crude prices and market fluctuations and uncertainties. The rupee is bound to become stronger because of the inflows. A stable exchange rate can help attract more FII investments. Banks will be able to lend more to the private sector as they will not be under pressure to buy more government bonds than they would want to. Investment plans for the infrastructure sector can also get a boost. It can lead to better integration of India’s financial markets into the global markets over the years. 

Though the announcement was widely welcomed it did not create any big impact in the market because it was expected and there is about an year for it to come into effect. There are operational hurdles to clear and procedures to be adopted, including those relating to debt settlement, fund repatriation and taxation before the move can become a reality. There are some risks involved, too, in greater integration into the global market. If the rupee strengthens as a result of greater capital inflows, there will also be issues like its negative impact on exports that will have to be tackled. There will be greater scrutiny of India’s financial situation and practices and a sharper focus on the government’s fiscal responsibility. In times of international stress, Indian government bonds may also feel pressure. The RBI may be presented with some challenges, but it will have better latitude to manage the rupee, but the government’s conduct with it will be watched closely.