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India’s inclusion in the JP Morgan emerging markets bond index is likely to strengthen the rupee by attracting significant foreign inflows. It will also lower borrowing costs for the government, allowing more money to be spent on public welfare.and help finance the current account deficit. Private businesses are set to benefit through reduced financing costs. Investors, however, may face volatility and the risk of lower bond yields. We explain how read more
 "How Indian bonds inclusion in JP Morgan index will affect rupee value, economy, businesses, and investors")
The Indian bond market is expected to see an additional inflow of $40 billion from foreign investors. Image courtesy: Pixabay
In September last year, JP Morgan announced that India would be included in its Government Bond Index – Emerging Market (GBI-EM) suite. On Friday (Jue 28), Indian government debt bonds will be included in the JP Morgan index.
What does this milestone mean for the Indian economy, currency, bond investors, and domestic businesses? We explain.
Impact on government borrowing
Government bonds are debt securities issued by a country to support government spending. Investors buy these bonds, effectively lending money to the government in exchange for periodic interest payments and the return of the principal amount at maturity.
The inclusion in JP Morgan’s index creates a pathway for foreign investors to participate more actively in the Indian bond market. According to JP Morgan forecasts, non-resident holdings of Indian bonds are expected to nearly double from the current 2.5 per cent to 4.4 per cent over the next year. Goldman Sachs has estimated that as much as $40 billion could flow into India over time due to this inclusion.
This increase in foreign inflows will help reduce the government’s dependence on domestic investors to fund its borrowing needs.
Higher demand for sovereign bonds will put yields under pressure, lowering government borrowing costs over time.
READ MORE: Why world’s biggest bond investors are set to bet big on India
Benefit for businesses
Theoretically, the government meeting part of its borrowing needs from foreign investors would mean that banks have a little more capital to deploy to businesses, according to Bloomberg.
Banks can pass on these benefits to businesses in the form of lower interest rates on loans. This can stimulate business expansion, innovation, and overall economic growth.
Potential impact on public welfare
Lower bond yields mean that the government pays less interest on the money it borrows. This reduction in interest payments can free up resources for other vital areas such as infrastructure, healthcare, education, and social welfare programs. With lower borrowing costs, the government can manage its budget deficit more effectively, borrowing more at a lower cost to finance its deficit, according to Moneycontrol.
This move is also expected to have a positive impact on India’s private credit and corporate bonds markets as well.
Impact on the rupee
When foreign investors buy Indian bonds, they must convert their currency, such as US dollars, into Indian rupees. This increased demand for the rupee boosts its value. The rupee may appreciate against other major currencies as more foreign investors enter the Indian bond market.
Increased foreign investment could introduce some volatility, particularly during times of global financial uncertainty. The Indian bond and currency markets might see fluctuations as investors react to global economic developments. The Reserve Bank of India (RBI) is aware of the potential for increased rupee volatility and has indicated readiness to tap into the country’s $656 billion in reserves to stabilize the currency.
One must remember that there are multiple other factors that affect the value of the rupee.
Risks for investors
While the market is relatively insulated from global sentiment swings due to the low proportion of foreign-owned government bonds, the increasing foreign participation could pose risks.
One major concern is the volatility from sudden outflows during global risk-off periods, which can disrupt stock and currency markets. As more foreigners buy Indian debt, the country will become increasingly vulnerable to sudden withdrawals of capital. For instance, in April, investors pulled almost $2 billion out of the market due to speculation about delays in rate cuts in the US, which made India’s yields less attractive.
READ MORE: Bonds, Indian bonds: Are they outshining those in other emerging markets?
In a nutshell
The inclusion of Indian bonds in JP Morgan’s GBI-EM index is a big milestone for the country. It opens the door for valuable foreign investment, which can lower the government’s borrowing costs, fund critical infrastructure projects, and boost economic growth.
However, it also brings challenges, including potential volatility and political risks. The Indian government and the RBI will need to carefully manage these aspects to maximise the benefits of this inclusion while mitigating the associated risks.
With inputs from agencies
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English (US) ·