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BREAKINGVIEWS-Ukraine war gives wings to India bond index debut

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Shritama Bose

MUMBAI, Sept 22 (Reuters Breakingviews) - A door to fresh capital just opened for India. JPMorgan will add the country’s government bonds to its emerging market index, easing concentration issues resulting from Russia’s exclusion following its invasion of Ukraine. The move drags foreign funds deeper into a $1 trillion sovereign debt market. But New Delhi may have to give an inch to win wider backing and fully unlock other gains.

The influential index compiler’s move follows the Reserve Bank of India’s 2020 decision to allow unfettered foreign investment in a small pool of government bonds. Yet red tape and lack of index inclusion have kept buyers away. Foreigners own less than 3% of the $400 billion of bonds they are eligible to buy under the window. That ratio will now increase.

For global funds tracking the index, India’s addition fixes a concentration problem. Seven countries account for almost 70% of JPMorgan’s GBI-EM Global Diversified index. India will be one of three countries, instead of five, with a 10% weighting alongside China and Indonesia at the expense of Mexico and Brazil among others. If investors make their full allocation over the 10-month period of inclusion through March 2025, India will attract some $24 billion.

There are manifold benefits for the South Asian nation. Most obviously, the government will be able to borrow for less: India’s 10-year bonds yield about 7.1%, 260 basis points above the equivalent tenure U.S. debt. The spread between the two country’s treasuries dropped to a 17-year low on Thursday’s announcement. New Delhi is also interested in a much bigger prize.

Sanctions against Russia rekindled India’s desire to internationalise its currency and relegated the RBI’s longstanding wariness of hot money flows to the backburner. A July report published by the central bank supported bond index inclusion as a step towards pushing global use of the rupee. India will need to work harder if it wants to be welcomed into other major benchmarks investors track, however.

Bloomberg’s Global Aggregate Index, for example, does not suffer concentration issues because it also includes developed markets. That means it has the luxury to wait for India to make trading easier. Authorities have improved settlement times but they may have to scrap the capital gains tax for offshore investors. The immediate prize there for India is smaller, a 0.5% weight in that index would imply passive flows of around $10 billion, per brokerage Emkay Global Financial Services. India may yet bend, for now it can savour the moment.

Follow @ShritamaBose on X


JPMorgan on Sept. 21 said it would include India in its key emerging market sovereign bond indices starting June 28. The inclusion of the bonds will be staggered over a 10-month period through March 31, 2025, taking the country’s weight in the index to the maximum 10%.

The index compilers’ GBI-EM Global index suite will include 23 Indian government bonds with a combined face value of $330 billion. (Editing by Una Galani, Katrina Hamlin and Streisand Neto)

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