The Inclusion of India in JP Morgan’s Bond Index Is Expected to Strengthen the Rupee and Attract More Foreign Investment

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JP Morgan Chase & Co announced that it will include Indian government bonds in its emerging markets bond index from June 2024. This move is expected to benefit India’s economy in multiple ways, such as boosting the Indian rupee and attracting a significant amount of foreign investment. This aligns with India’s vision of achieving a $5 trillion economy and positions the country as an attractive investment destination amid global economic changes.

Experts estimate that this inclusion could attract around $25 billion in foreign investment into India’s government securities market, due to factors like yield and market stability. Passive inflows could also amount to approximately $26 billion as a one-off stock adjustment over the scale-in period, with active flows potentially bringing in at least another $10 billion. In total, this could lead to inflows of over $40 billion into India’s fixed-income markets over the next 1.5 years.

This influx of foreign investment is expected to lower borrowing costs for the government, strengthen the rupee, and improve India’s credit rating. It can also provide a significant source of funding for essential infrastructure projects, such as building roads, bridges, schools, and hospitals while reducing the country’s current account and fiscal deficits.

Managing liquidity and potential volatility in the Indian bond market, as well as currency exchange rates, will pose significant challenges. To mitigate potential inflationary risks, fiscal and monetary policies must be responsive to global perceptions and market dynamics.

The inclusion of Indian bonds is also expected to increase demand for the rupee, potentially leading to a nominal appreciation of the currency. The Reserve Bank of India is likely to absorb some of the dollar inflows and ensure the competitiveness of exports while providing the rupee a cushion against a multi-year ascent in US bond yields and hardening crude oil prices.

India’s inclusion in JP Morgan’s index highlights its growing importance as a market for global investors, particularly as they seek alternatives to China and other emerging markets. It positions India as one of the best-performing economies, boosting foreign portfolio investments and enhancing its global economic stature.

Traders are now optimistic about a similar announcement by the Bloomberg Global Aggregate Index in the coming months, which could further increase inflows into India. The inclusion will be phased in gradually over ten months, concluding on March 31, 2025, ensuring a smooth transition into the index.

BNP Paribas is optimistic about India’s bonds after JPMorgan’s inclusion in the market. The bank predicts a 10-year rally.

BNP Paribas Asset Management has become more optimistic about Indian government bonds since they were added to JPMorgan’s emerging market bond indexes. This move is expected to bring in around $20 billion in domestic bonds over the next two years. According to Jean-Charles Sambor, Head of Emerging Markets Fixed Income at BNP Paribas Asset Management, bonds will rally and the 10-year benchmark bond yield will ease below 7% by the end of the year. The recent muted reaction is due to weak global risk appetite, but inflows may increase if India joins other global indices. Furthermore, bond index inclusion is also expected to boost the local currency, with the rupee predicted to rise from its current near-record lows.

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