India JPMorgan Bond index inclusion: Impact on economy, sectors & stock market 

With the inclusion of government bonds in JPMorgan GBIEM index could lead to strong bond inflows in coming months. Coupled with falling inflation and fiscal consolidation, it can lead over 50 basis points of yield compression and strong rupee, analysts said. A further inclusion of Bloomberg Barclays EM index and FTSE Russell index are likely in due course. If that happens, there could be $60 billion of incremental FPI bond inflows in the next 2-3 years, anlaysts said. 

Announced in September 2023, the index inclusion of Indian Government Bonds (IGB) commenced today. A 10 per cent weight for IGB in the JP Morgan EM Bond Index could lead to inflows worth $21 billion (Rs 1.7 trillion) worth of investments by March 31, 2025. A total of 1 per cent weight would be added each month till March 2025. Starting January 2025, Bloomberg Index Services Ltd. will incorporate Indian bonds into its Bloomberg EM Local Currency Government indices. FTSE (Financial Times Stock Exchange) Russell from Britain is also contemplating the inclusion of India in its fixed-income indices.

"FPI’s currently hold around 2.4 per cent of the outstanding Indian government bonds, which is likely to increase in the next 12 months as the staggered inclusion commences," said Mirae Asset MF.

Parul Mittal Sinha, Head of Financial Markets for India and Co-Head of Macro Trading for ASA at Standard Chartered said the index inclusion is set to significantly reshape the landscape of emerging market bonds. And, more broadly, this may help reinvigorate developed market flows to emerging markets.

"Since October 2023, non-residents have poured almost $10 billion into Indian government bonds, and an additional $5 billion though dollar-settled, INR-denominated supranational bonds. With $2.3 billion inflow in June alone, there's strong confidence that by the end of March 2025, index trackers will have a 10 per cent weight allocated to India,” she said.

IIFL Securities said there are chances of private capex cycle getting triggered will improve with cost of capital reduction. Inclusion of sovereign bonds in global indices will contribute to deepening India’s debt markets, it said.

"But softer yields don’t necessarily mean higher stock market multiples. Not that multiples have been waiting for lower yields before expanding," the domestic brokerage said. IIFL Securities said capex has been observed to be closely following “growth rate – borrowing cost” levels, and this currently is close to 2.5 per cent for India, much lower than the 8-10 per cent levels it was 15 years ago. 

A fall in market borrowing costs is sorely needed, it said. 

"The inflows discussed above along with fiscal consolidation and falling inflation can result in yield compression of > 50bps and could trigger a capex cycle. Real Estate has been doing well and its bull run will continue, pulling along cement and building materials which are due for a volume acceleration after a long period of real estate inventory normalization. NBFCs will do very well, typical of a rate / yields easing cycle, and that is imminent. Rupee will be strong in the medium term and that will shave off something from IT sector’s PAT growth," it said.

Forex reserves would look good, though external debt will also rise, and that Indian yields' reactions to large global events will be more pronounced.  "We are loathe to however say that Indian market multiples will expand further," IIFL Securities said.

IIFL Securities said traders have already been pre-positioning for this JPMorgan inclusion. Smaller funds may invest in Indian bonds through participatory notes, as direct registration may not be feasible. "By April 2025, total investments could reach around $30-35 billion (starting from Sep’23) including active funds. Beyond JP Morgan index, the Bloomberg EM Local Currency Government TR Index will also include Indian debt in January 2025, potentially bringing in $2-3 billion of inflows, all upfront," it said.