India's inclusion in JP Morgan bond index signals positive boost for financial flexibility and capital markets development

New Delhi [India], November 7 : India's inclusion in certain emerging-market bond indexes managed by JP Morgan is anticipated to diversify the investor base for Indian government securities.
According to a report by Fitch Ratings, this move is likely to contribute to a slight reduction in funding costs and encourage further development in the domestic capital market.
While India faces challenges related to high government debt and interest/revenue ratios, which can affect its credit profile, the immediate impact on fiscal credit metrics and profile is expected to be modest, according to Fitch Ratings.
The JP Morgan Government Bond Index-Emerging Markets (GBI-EM) indexes are set to include local-currency government bonds issued under a fully accessible route (FAR), potentially attracting around USD 24 billion in passive inflows between June 2024 and March 2025.
The inflows could be more substantial if other indexes also decide to include Indian government securities.
This change is expected to significantly increase foreign investor holdings of central government bonds, despite their current representation being relatively small.
Foreign investors held approximately 1.6 per cent (USD19 billion) of the market as of 2Q23, including around USD12 billion of bonds issued under the FAR.
However, their influence on debt pricing is predicted to be limited.
India's sovereign financing costs are presently less vulnerable to external factors due to the predominant role of domestic financing.
Yet, if non-resident holdings of government securities increase substantially and fiscal metrics remain weak, this vulnerability could grow over time.
Still, it is the baseline assumption that India's fiscal policy approach won't be significantly affected by inclusion in the JP Morgan GBI-EM indexes.