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Indian Government Bonds in JP Morgan Index
Context:
Indian Government Bonds (IGBs) will be included in JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) for a period of 10 months. This is likely to bring nearly $20-25 billion into the country, boosting foreign exchange reserves and the rupee.
JP Morgan Emerging Market Bond Index (EMBI)
Eligibility for Inclusion:
- Only IGBs designated under the Fully Accessible Route (FAR) are eligible.
- FAR was introduced by RBI in March 2020 for non-residents to invest in specified Government of India dated securities.
Eligible instruments must have:
- Notional outstanding above $1 billion (equivalent).
- At least 2.5 years remaining maturity.
- Created in the early 1990s, it is the most widely referenced index for emerging market bonds.
- It began with the issuance of the first Brady bond and has since expanded to include:
Government Bond Index-Emerging Markets (GBI-EM) and Corporate Emerging Markets Bond Index (CEMBI).
Significance:
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- It oversees approximately $213 billion in assets worldwide, and holds significant sway as a benchmark for emerging market bonds.
- India’s anticipated 10% weight in this index could draw around $21 billion (Rs 1.7 trillion) in investments, assuming initial zero exposure.
- This could prompt other major EM index providers like Bloomberg and Financial Times Stock Exchange (FTSE) to consider including India, leading to additional economic inflows.
Impact of Bond Inclusion
- It will lead to new active investments in the debt market, which is currently underutilised in terms of external financing.
- This will not only lead to reduced risk premiums but will also assist India in financing its fiscal and current account deficit (CAD).
- It will increase the liquidity and ownership base of government securities (G-secs and debt instruments).
- It may help lower funding costs and support domestic capital market development.
- Higher inflows can raise inflation as the Reserve Bank of India (RBI) absorbs the dollars and releases an equivalent amount in rupees.
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Challenges in India’s bond markets:
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