What JPMorgan Adding India to its EM Bond Index Means

Money has been flowing into the $1 trillion Indian government debt market this year, defying a global rout in bonds as foreign investors placed bets that India could finally be added to global bond indexes. Those bets have been proved right: In a milestone for Asia’s third-largest economy, JPMorgan Chase & Co. has announced it will add Indian government debt to its benchmark emerging-market index starting in mid-2024. Overseas investors will get a new way to put money into a giant economy that has been offering some of the highest returns in the region. JPMorgan will be able to tout greater diversification following the exclusion of Russia last year, and as concerns over US-China geopolitical tensions persist. For India, the move represents greater connectivity between its domestic and global financial markets — and the potential for lower borrowing costs.

India began liberalizing its economy in 1991 but does all its borrowing locally in rupee bonds because it wants to avoid the kind of dollar dependence that provoked the Asian currency crisis and other meltdowns. But in late 2019, India started working to gain access to bond indexes in a bid to lower its borrowing costs by generating additional demand — and to tout its financial discipline. As Covid-19 was ravaging the economy and the government was borrowing at record levels to fund a multibillion-dollar stimulus package, it opened a swath of its sovereign bond market to overseas investors. At the time, however, global funds were selling emerging-market assets to hoard dollars. More recently, foreign investors held just 0.4% of Indian sovereign debt in March this year, against a ceiling of 6%. That’s among the lowest for any big emerging market. New Delhi balked at tax changes for foreigners that would have facilitated trading of Indian debt on international platforms such as Euroclear. There were also domestic political objections about granting tax exemptions for foreign investors. Those concerns, however, may have been overridden by investors’ needs for more options in emerging market sovereign debt. Almost three-quarters of benchmark investors surveyed were in favor of India’s addition to the index, the JPMorgan team said.