New Delhi: In a historic achievement for Indian Government Bonds (IGBs), these bonds will be included in the JP Morgan Emerging Market Index for the first time on June 28. It will allow foreign and non-resident investors to invest into the Indian bond market, bringing fresh capital for meeting the country's infrastructure development needs.
In September 2023, JP Morgan announced that the government bonds issued by the Reserve Bank of India will be included in its emerging market index from June 2024.
Indian policy makers have been trying for inclusion of the government bonds into major indices such indices managed by major index managers as JP Morgan, Bloomberg and FTSE for quite some time. However, due to several reasons, including average country rating by the sovereign rating agencies such as Moody's, Standard and Poor's, and Fitch, Indian government bonds were not included in major bond indices.
With IGB's inclusion in the JP Morgan index, India will become the 25th market to enter into the index manager's Emerging Market Local Currency Government Bond indices (GBI-EM GD). India will have a weight of 10 per cent in this flagship index in a phased manner over a period of the next 10 months.
Which IGBs will be included in the index?
According to the officials, bonds classified under the Fully Accessible Route (FAR) will be eligible for inclusion in the index. At present, there are 27 Fully Accessible Route (FAR) - designated IGBs which can be included in JP Morgan's emerging market index. JP Morgan says that with the inclusion of IGBs in its emerging market index, the share of non-resident investors in the Indian market will increase from 2.5 per cent to 4.4 per cent over the next year.
How much investment India can expect?
As per India's 10 per cent weight in the index over a period of next 10 months, some analysts believe that it will fetch an investment of 20-25 billion US dollars in the Indian bond market. India is desperately looking to attract foreign investment in the country by way of foreign direct investment (FDI), foreign portfolio investment (FPI), and inclusion in JP Morgan's EM index will come as a big boost to long-term foreign investment in the country.
The road ahead
The inclusion of IGBs in JP Morgan's emerging market diversified bond index opened the pathway for Indian Government Bond's inclusion in other major indices as well. After JP Morgan's announcement in September 2023, Bloomberg also announced in March 2024 that it will include Indian government bonds in its own indices in a phased manner.
Soon after, in March 2024, Bloomberg made its own announcement of India’s inclusion into its EM Local Currency Government indices. India has already ramped up its capital expenditure over the last few years and the cumulative budget outlay for capital expenditure for the last three years has been estimated at around Rs 30 lakh crore with a record allocation for the current financial year at over Rs 11 lakh crore.
However, this capital expenditure spree is primarily driven by the public sector and private sector is yet to pitch in a big way. India's inclusion in major global indices will open flood gates for major foreign investors to invest into India's bond market as they are not inclined to consider any significant investments outside of major global bond indices.
The estimated investment of 20-25 billion US dollars means that the country can expect an additional investment of Rs 1.7 lakh crores to over Rs 2 lakh crores in the next 10 months, which is around 18-20 per cent of India's total capital expenditure for the last financial year.
India's actual capital expenditure for the financial year 2022-23 was estimated at over Rs 7.4 lakh crore while Finance Minister Nirmala Sitharaman had allocated a record over Rs 10 lakh crore for the last financial year. However, the interim budget presented by her before the General Elections pegged the revised estimates for the capital expenditure for the last financial year at a tad lower at Rs 9.5 lakh crores.
Despite the government's inability to spend the entire budgetary allocation of Rs 10 lakh crore for the last financial year, in the interim budget for FY 2024-25, Sitharaman increased the budget allocation for the current financial year at over Rs 11.11 lakh crore.
Inflationary Pressure
Some economists believe that such a huge foreign investment of 20-25 billion US dollars in the Indian market over the next 10 months may lead to inflationary pressures in the country which is already witnessing high inflation. A strengthening US dollar and high global commodity prices may further compound the inflationary pressure for commodity-importing countries such as India that import huge amounts of crude oil and other resources from the world market.
