Government bonds news: Indian bonds officially became part of the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Series on Friday, a major development expected to attract $25-30 billion in inflows into the country. The move positions India as the 25th market to join the index since its inception in June 2005.

Market impact and inclusion details

In 2023, turnover in Indian local market instruments exceeded $350 billion, accounting for 9.2 per cent of the total emerging market (EM) trading volume. The inclusion, announced last year, mandates index-tracking funds to purchase Indian bonds to align their portfolios with the index, creating immediate demand and enhancing the visibility and credibility of Indian bonds, Mirae Asset Mutual Fund said in a note.

With a 10 per cent weightage in the index, it is estimated that $20-25 billion of foreign investment will flow into India in FY25. On the first day of inclusion, index-tracking funds reportedly invested up to $500 million into the bond markets, leading to a strengthening of the rupee from 83.45 to 83.38 against the dollar, despite the rise in the dollar's value and crude oil prices in international markets, the fund house noted.

Recent inflows and confidence

Since October 2023, non-residents have invested almost $10 billion in Indian government bonds, alongside an additional $5 billion through dollar-settled, rupee-denominated supranational bonds. With a $2.3 billion inflow in June alone, there is strong confidence that by the end of March 2025, index trackers will have a 10 per cent weight allocated to India, according to Parul Mittal Sinha, who heads financial markets in India at Standard Chartered Bank.

Understanding JP Morgan Emerging Market Bond Index (EMBI)

The JP Morgan Emerging Market Bond Index (EMBI), established in the early 1990s, is a benchmark for tracking total returns for traded external debt instruments in emerging markets. It includes various high-yielding local rates indices such as the GBI-EM series and the Corporate Emerging Markets Bond Index (CEMBI) series, considered standard benchmarks by many investors in developed economies. The index manages assets worth approximately $236 billion.

Eligibility criteria and future inclusions

Only Indian Government Bonds (IGBs) issued by the Reserve Bank of India (RBI) under the 'Fully Accessible Route (FAR)' are eligible for inclusion. All FAR IGBs maturing after December 31, 2026, with a minimum outstanding amount of Rs 1 lakh crore, qualify for the indices. Starting January 2025, Bloomberg Index Services Ltd. will include Indian bonds in its Bloomberg EM Local Currency Government indices. Additionally, FTSE Russell from Britain is considering incorporating India into its fixed-income indexes, Mirae Asset Mutual Fund noted.

Global investor reactions and yield changes

Global funds have been increasing their holdings in longer-term maturity bonds since the announcement, particularly in the 6-10-year segment, while reducing their short-term securities holdings. Historically, yields for countries included in the index have inched higher post-inclusion. For Indian Government Bonds, the price has significantly increased, resulting in falling yields. For instance, the 10-year IGB issued at a 7.13 per cent yield for October 2033 maturity has seen its yield drop to 7.06 per cent, Mirae Asset said.

Fund management insights

Active flows have remained robust post-announcement, and passive flows are expected to increase over the next nine months, likely resulting in a supportive domestic macroeconomic backdrop and a lower overall yield curve. With expectations of a rate cut in the current financial year, markets are supportive of bull steepening of the yield curve, where short-term interest rates fall faster than long-term rates, Mirae Asset added.

Indian bonds in JP Morgan Index: What it means for bond market

In 2023, turnover in Indian local market instruments exceeded $350 billion, accounting for 9.2 per cent of the total emerging market (EM) trading volume.

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