Indian government bonds are to be added to the main emerging market local currency debt index for the first time after a decade-long wait.
The assets will enter the JP Morgan Government Bond Index – Emerging Markets Global Diversified Index with a 1 per cent weight at the end of June and rise gradually to a 10 per cent index weight by April 2025.
This gradual process will reduce the impact on other markets that will see their weights reduced and allow investors to navigate the complexities of investing in the market. JP Morgan may also require certain conditions to be reached before it approves a full weighting, meaning it could take longer than 10 months.
This will be the second-largest bond market in the emerging market universe behind China with US$330 billion of debt.
However, despite its size, it has been difficult for foreign investors to access which has delayed its inclusion to the index.
Mark Evans, investment specialist within emerging market debt and currency at Ninety One, said: “Hurdles to index entry include the lengthy process of opening local custody accounts, a requirement of pre-funding (which not all local custodians facilitate), and operational foibles around trading. While most of these challenges remain, significant investor demand appears to have tipped the balance in favour of index inclusion.”
While the inclusion will be welcome news for those looking to access the asset, Evans said he does not expect it to have a material effect on asset prices. Foreign ownership of Indian debt is around 2 per cent and is expected to rise to around 5 per cent following its index inclusion, meaning new inflows will be small.
“Although an estimated US$23.6 billion could flow into India’s debt market as a result of index inclusion – equating to around 17 per cent of India’s annual net borrowing for 2024 – we believe local financial institutions, including the central bank, are likely to soak up this demand.”
Ninety One’s preference, he said, is for a benchmark-neutral stance on Indian duration as he believes valuations are rich and there is no need for the central bank to start easing policy rates.
