Mumbai: India’s inclusion in JP Morgan’s GBI-EM bond index global suite starting June 2024 and the anticipation of such announcements by other index providers mean that the local bond market will now function within a universe of globalised investment criteria.
Essentially, the domestic government bond market will be watched in accordance with certain global criteria of liquidity and trading ease. The sovereign credit rating and tax policies of the government also assume greater significance as large dollar inflows enter India.
The Reserve Bank of India had in 2020 significantly smoothened the path for index inclusion by introducing a ‘Fully Accessible Route’ (FAR) list of government bonds whereby overseas investors would have complete access to certain specified securities.
Unlike usual foreign portfolio investment flows, which quickly change direction based on macroeconomic fundamentals, overseas investors who track a global index make allocations according to the weights of the index. This ensures a stable, long-term flow of funds.
According to the “10/10” rule, the inclusion of FAR government bonds will be staggered into the GBI-EM Global Diversified over 10 months, starting June 28, 2024, till March 31, 2025, with a 1% weight being included each month, JP Morgan said last week.
Apart from JP Morgan’s much-tracked emerging market bond index, the two other indices which market participants hope will announce India’s inclusion are the Bloomberg Global Aggregate Index and the FTSE Emerging Markets Government Bond Index. JP Morgan announced India’s inclusion last week.
INDEX REQUIREMENTS
JP Morgan said last week that according to index inclusion rules, eligible instruments must have a notional outstanding above $1 billion – around Rs 8,300 crore – and at least 2.5 years of remaining maturity. When inclusion starts on June 28, 2024, only government bonds designated under the FAR for overseas investors which have a maturity date after December 31, 2026 will be assessed for eligibility.
At present, the total indicative of aggregate holding of foreign portfolio investors in the FAR category is Rs 95,193.41 crore, Clearing Corporation of India data show.
Among other requirements, a key aspect, emphasised by JP Morgan in an August 31 note about the GBI-EM Global Diversified Index, was the strict enforcement of liquidity criteria in the selection of instruments. Requirements include sufficient trading frequency of bonds to prevent stale price quotations, and easy availability of bonds.
JP Morgan’s index research team also said that the index excludes countries where local market investing is subject to explicit capital controls, but eligibility requirements do not factor in regulatory or tax hurdles.
In the note last week which announced India’s index inclusion, JP Morgan said Egypt had been placed on Index Watch Negative in the GBI-EM series because of material foreign exchange repatriation hurdles reported by investors, adding that the country’s index eligibility would be determined over the next three to six months.
For the Bloomberg Global Aggregate Index, securities must have an investment grade rating of Baa3/BBB- or higher. India has an investment grade sovereign rating.
“Local currency treasury and hard currency sovereign issues are classified using the middle issuer-level local currency and hard currency debt ratings from each agency for all outstanding bonds, even if bond-level ratings are available,” an August 2021 Bloomberg Global Aggregate Index note read.
According to an August 31, 2023 factsheet by the FTSE Russell, minimum maturity for the FTSE Emerging Markets US Dollar Broad Bond Index is at least one year, while fixed-to-floating rate bonds are taken away a year prior to the fixed-to-floating rate date.
The minimum issue size for a foreign government bond is $500 million while the sovereign rating must be at least C by S&P and Ca by Moody’s.
CURRENT SITUATION
In March 2023, the FTSE said India remained on the FTSE Fixed Income Country Classification Watch List for consideration with regard to including the country in the Emerging Markets Government Bond Index. The FTSE index is expected to complete a review by September 28.
ET reported earlier this week that major global investors have requested the Bloomberg Global Aggregate Index to push forward a review meeting to October so as to potentially hasten the inclusion of India in the index.
The flows from the JP Morgan index inclusion — which is effective June 2024 — are estimated at $20-25 billion. If included, traders expect a 0.6-0.8% weight in the Bloomberg index, which would imply flows of around $20 billion-24 billion. The FTSE emerging markets bond index, which is smaller than the other two, may bring in around $2.5 billion if India were to be included.
