New Delhi: India’s inclusion by investment bank JP Morgan in one of its emerging markets bonds indices will reduce borrowing costs for the Indian government as well as for Indian companies, and will also ease pressure on the rupee’s exchange rate, bond market analysts and research agencies have said.
JP Morgan Thursday issued a note in which it said that India would be included in the bank’s Government Bond Index-Emerging Markets (GBI-EM). This inclusion of Indian government bonds — a tool that the government uses to borrow from the market — would be staggered over a 10-month period starting 28 June 2024.
“Currently, 23 Indian Government Bonds (IGBS) with a combined notional value of US$ 330 billion are index eligible,” JP Morgan said.
Officials in the Ministry of Finance were quick to praise the move, with Economic Affairs Secretary Ajay Seth saying “it is a welcome development showing confidence in the Indian economy”.
The central government’s Chief Economic Adviser V. Anantha Nageswaran said that JP Morgan’s decision “attests to the confidence that financial market participants and financial markets, in general, have on India’s potential and growth prospects and its macroeconomic and fiscal policies”.
Analysts ThePrint spoke to believe that the benefits of this move will extend to Indian companies as well.
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How India can benefit
Governments and companies use bonds to borrow from the market (other companies and the public), as opposed to from banks. An entity looking to borrow funds from the market issues a bond with a particular interest rate, called the yield of the bond. A potential investor purchases these bonds — effectively lending money to the issuer — if the yield is attractive enough.
At the end of the stipulated period, the borrower needs to repay the purchaser of the bond with interest. The higher the demand for a particular bond, the lower its yield needs to be to attract investors.
As foreign demand for Indian government bonds increases due to the inclusion in the JP Morgan index, the interest rate the government needs to pay for its bond-related borrowing will fall. In other words, it will become cheaper for the government to borrow.
However, as part of the emerging markets index, India’s bonds will still remain attractive in the global financial market even after its yields fall.
The inclusion of India in JP Morgan’s index, which will make available Indian government bonds for purchase by foreign investors, is expected to also significantly increase the quantum of funds flowing into India’s bond market.
Wealth funds, pension funds, and companies looking to invest in bonds often get advice from investment banks like JP Morgan. On their part, these investment banks create indices that group together similar bonds and offer them as packages to these potential investors.
Each country in the index gets a weightage, and so the total investments in these indices are distributed to each country in that index according to their weightage.
This is how the inclusion of India in JP Morgan’s emerging markets grouping exposes the government’s bonds to potential foreign investors. As they invest in this index, Indian bonds will receive a share of this investment.
JP Morgan said that India is expected to reach the maximum weightage of 10 percent in its GBI-EM Global Diversified Index.
Cheaper borrowing for government & companies
According to Rishi Shah, partner in public sector consulting at financial advisory firm Grant Thornton Bharat, JP Morgan’s inclusion of Indian government bonds is another affirmation of the strong macroeconomic performance on the domestic front.
“The increase in weightage in the EM bond index will have a ripple effect on several key areas,” he said
First, Shah explained, there will be a direct impact on the pricing and the inflows of funds into India’s bond market.
“As more investors flock to EM (emerging market) bonds, prices will fall, leading to lower yields or interest rates,” he said. “This will make it cheaper for the government to borrow money.”
This is something other market analysts have said as well.
V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, said that the benefit from this inclusion will extend to Indian companies as well and won’t be limited to the government, even though it is government bonds that are to be included in the index.
“The foreign demand for Government of India bonds will push down their yields,” he said. “This will happen much earlier than the date for inclusion, which is June 2024. Most of the corporate bonds yields are benchmarked to the yields on government bonds. Therefore, yields will decline pan-India and across industries.”
Vijayakumar said the resultant decline in the cost of capital for companies will translate into higher profits for the corporate sector, “which, in turn, will boost stock prices, enabling the stock market to scale higher levels”.
Reuters reported Friday that Citi and Bank of America have both said they expect the yields on India’s benchmark 10-year bond to fall to below-7 percent levels in the coming months.
Impact on rupee exchange rate
Shah said that the second impact of India’s inclusion in the JP Morgan index would be in the foreign exchange market.
“The increase in weightage will have a positive impact on the forex markets,” Shah explained. “More dollar inflows will mean greater stability over the long term.”
The thinking here is that as Indian government bonds become more attractive to foreign investors, more foreign currency — predominantly US dollars — will flow into the country, thereby bolstering India’s foreign exchange reserves and strengthening the rupee.
This “could have a positive impact on our currency in the medium to long run”, Shantanu Bhargava, managing director and head of discretionary investment services at Waterfield Advisors, told ThePrint.
(Edited by Uttara Ramaswamy)
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