Indian government bonds join JP Morgan EM Bond Index

Jun 29, 2024, 11:46:19 AM IST1/7

What is JP Morgan Emerging Market Bond Index (EMBI)?

EMBI was formed in the early 1990s which has various high yielding local rates indices like the Government Bond Index-Emerging Markets (GBI-EM) series and the Corporate Emerging Markets Bond Index (CEMBI) series and are considered standard benchmarks by many developed economies’ investors, according to a press release by Mirae Asset Mutual Fund.

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What is the importance of JP Morgan Index?

It tracks total returns for traded external debt instruments in the emerging markets, and has assets under management of about $236 billion. As announced in Sept-2023, the index inclusion of Indian Government Bonds (IGB) shall commence 28th June 2024 onwards. A 10% 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 31st March 2025. 1% weight will be added each month from June-24 till Mar-25.

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What is the eligibility criteria of Indian Bonds?

Only Indian Government Bonds (IGBs) issued by the Reserve Bank of India (RBI) under the ‘Fully Accessible Route (FAR)’ shall be included in the indices. All FAR IGBs maturing after December 31, 2026 will be eligible and minimum outstanding amount is beyond Rs 1 lakh crores.

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Which other indices are planning to include IGBs?

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 indexes.

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What did India’s FAR bonds experienced since the news came out?

Foreign investors have already invested approximately $10 billion in securities eligible for inclusion. FPI’s currently holds around 2.4% of the outstanding Indian Govt Bonds, this is likely to increase in the next 12 months as the staggered inclusion commences.

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How have Global Investors reacted to this inclusion?

Since the announcement various global funds started raising their holdings in longer term maturity bonds. The 6Y to 10Y segment saw the maximum increase. Meanwhile, their holding in short-term securities has consistently decreased during this period.

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What could Investors do at this point?

Short and Low duration category could make a good case of investment due to variegated maturity profile. Further, as & when bull steepening (short-term interest rates fall faster than long-term rates, resulting in a higher spread between the two) takes place these categories could remain attractive.

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