That will change afterwards JPMorgan Chase & Co Thursday became the first global index provider to include it in its emerging markets index. The decision paves the way for an inflow of billions of dollars, just at a time when the bond market is under pressure due to record government borrowing.
“This could be a push factor to stimulate foreign inflow to India and foreign investors are likely to be more active in the Indian fixed income market,” Morgan Stanley strategists led by Min Dai wrote in a note, calling the index inclusion a “landmark event.”
The move supports India’s aspirations for greater global weight as the country boasts one of the fastest economic growth rates in the world and positions itself as an alternative to China. At the same time, the inclusion will open the country’s public finances to greater scrutiny by foreign investors, likely increasing the volatility of local markets.
The inclusion will begin in phases from June 2024. India will achieve a maximum 10% weighting in JPMorgan’s flagship emerging markets index, which has a benchmark of $213 billion.
Goldman Sachs Group Inc expects an inflow of more than $40 billion from active and passive funds over the next eighteen months. The purchases will be “implemented immediately as investors prepare for withdrawal,” strategists led by Danny Suwanapruti wrote in a note on Friday.
Foreign investors currently own less than 2% of government bonds. Officials have worried in the past about the consequences of excessive debt inflows, which have made local banks and mutual funds the main buyers of bonds.
The index news “should structurally bode well for interest rates and currency markets, leading to lower borrowing costs for the economy and more responsible fiscal policies,” said Madhavi Arora, chief economist at Emkay Global Financial Services Ltd.
Kotak Mahindra Bank expects foreign ownership to rise to 3.5%-4% by the end of fiscal 2025 as investors pour money into a high-yield market.
The benchmark 10-year yield could fall to 6.9%-6.95% in the next six to eight months if the global environment improves, said Jayesh Mehta, country treasurer of India at Bank of America in Mumbai.
They closed at 7.19% on Friday.
Bloomberg LP is the parent company of Bloomberg Index Services Ltd, which manages indexes that compete with those of other service providers.
