Industry Updates

JP Morgan launches fresh consultation on India bond index inclusion – report

Inclusion would drive $30bn of passive investor inflows

Theo Andrew

India arch on beach

JP Morgan has opened a fresh consultation with investors about the addition of India to its emerging market bond index, a move that could drive tens of billions of passive inflows.

The bank opened talks with fund managers this summer covering roughly 85% of the $240bn in assets under management tracking the GBI-EM Global Diversified index on whether to include Indian rupee-dominated bonds, the Financial Times reported.

India’s inclusion has long been touted for and would be a turning point for the indices, driving an estimated $30bn inflows, according to Goldman Sachs.

Previously, Morgan Stanley estimated inclusion in the indices would channel between $170bn and $250bn inflows into the country’s fixed income market over the next decade, compared to the $36.4bn added over the last 10 years.

Indian government bonds rallied following the news, with the yield on the 10-year debt falling 0.11% to 7.18%, as at 31 August.

The consultation is set to be completed next month with an announcement expected in October. JP Morgan declined to comment.

The country’s bond market is currently worth around $1trn and an estimated $270bn of fully accessible route (FAR) sovereign bonds would be eligible for the index. It follows a decision in March 2020 by the Reserve Bank of India to allow foreign financial institutions to invest in Indian bonds without restrictions for the first time.

Currently, India is not included in other major bond indices including the FTSE Emerging Market Bond index and the Bloomberg Global Aggregate index.

Last year, FTSE Russell placed Indian government bonds on a watchlist for inclusion and is set to review its status next month.

Lee Collins, head of index fixed income, Legal & General Investment Management, said the move would be as significant as China’s inclusion in the same index a couple of years ago.

"With Indian government bonds currently not being included in any of the major global fixed income indices, inclusion in indices such as JP Morgan’s, Bloomberg’s Global Aggregate and the FTSE WGBI index would significantly widen the pool of foreign investors into this market. Inclusion in Bloomberg’s Global Aggregate index has been estimated to potentially lead to $10bln of inflows for example."

"Clear progress has been made in recent years by the Reserve Bank of India to ease access for foreign investors."

The asset manager currently runs the only ETF in Europe that currently covers the Indian bond market, the L&G India INR Government Bond UCITS ETF (TIGG) – tracking the JP Morgan India Government FAR Bonds index – which has amassed $279m assets since launching in October last year.

Previous issues around India’s inclusion in the index have been around where and how the bond trades would be settled – whether in India, where investors would be subject to registration procedures, or outside the country on platforms such as Euroclear.

The option to settle outside of India was last year vetoed by the Indian government as issues around capital gains tax would adversely impact Indian investors. Commentators do not estimate this to be a major barrier to entry, as it has not prevented the entry of both China and Indonesia in the index.

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