Inclusion of India in the Global Bond Index - Emerging Markets
India is set to make a significant stride in its financial market as it prepares for inclusion in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) starting June 2024. This development adds to the broader appeal for investment into India, underpinned by strong demographic advantages, a skilled labor force, political stability, and business-friendly reforms.
Market Diversification
The inclusion of Indian government bonds in the GBI-EM is expected to attract significant foreign portfolio investment (FPI), increasing market diversification by bringing in a broader range of investors. This influx of foreign capital is already evident, with debt FPI flows into India averaging about INR 11,500 crore per month between September 2023 and June 2024.
India’s integration into global bond indices enhances its position in the global financial ecosystem, making its bond market more attractive and accessible to international investors.
Cost of Funding
By attracting more foreign investors, India can potentially lower its cost of funding. Increased demand for bonds can lead to lower yields, making borrowing cheaper for both sovereign and corporate entities. The improved liquidity in the bond market, a result of inclusion in global indices, is crucial for sustaining lower funding costs and enhancing market efficiency.
Broader Investment Appeal
With India's sovereign rating upgrade to BBB in 2025, the country offers an attractive risk-reward profile compared to other emerging markets, making it more appealing for long-term strategic investments rather than short-term trades.
The corporate bond market is expected to grow significantly, with projections suggesting it could more than double from FY24 to FY30. This growth is driven by the flexibility and cost efficiency of bonds compared to traditional bank loans, attracting a diverse base of investors.
Overall, India's inclusion in the GBI-EM is expected to strengthen its bond market by enhancing international investment, reducing borrowing costs, and increasing the appeal of Indian bonds to both foreign and domestic investors.
Moreover, the size of India's economy is expected to double between now and 2030, due to these macro-opportunities. This move could provide access to a large and persistent pool of benchmark-driven savings allocation for capital-deficit economies like India.
Including India in the EM index would make EM benchmark investment more diverse and representative of economic potential and market capitalization. For India, this could potentially reduce the cost of funding over the next year to 18 months, amounting to $25bn or more as investors who track this index build up exposure.
The inclusion in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) will attract foreign portfolio investment, boosting market diversification by bringing in a broader range of investors, as well as enhancing India's position in the global financial ecosystem (finance, investing, business). Also, with India's potential lower cost of funding due to increased demand for bonds, investors are more drawn to its attractive risk-reward profile and growing corporate bond market (finance, investing, business).
