JP Morgan Global Bond Index

India is on a mission to hit the $5 trillion economy mark in the next few years.  To fuel this financial rocket, the government will need to shell out monies across the board and borrow from investors. This is where bonds come into play.  The government issues these bonds, raises the money it wants from investors, and repays it back with interest. Let us explore in detail, one concept at a time.

Understanding Bonds: What are Bonds?

You lend money, and you get it back with interest. Bonds are like that.  They represent a debt that an investor provides to the issuing entity, often a government or a corporation.  In return, they receive regular interest payments and the principal amount at maturity. The Indian government, with the help of the Reserve Bank of India (RBI), has been issuing bonds. It sells these bonds to investors, and the funds they raise are used for various economic needs. But the government realised that it isn’t fully tapping into the potential of bond markets. For instance, most of the government bonds are bought by domestic investors and the government misses out on a lot of global funds. It’s because foreign investors don’t participate in Indian bond issues as it’s a complex process and they would rather pick up a foreign index that makes it easier for them to invest in a basket of bonds and track it. For a while, it has been working with entities that have such global bond indexes for its inclusion. It has been working on meeting stringent requirements, removing investment limits, and many such measures.

JP Morgan Global Bond Index

There are many entities that help investors track the performance of government bonds across the world.  One such index is created by JP Morgan and it’s called the Government Bond Index – Emerging Markets (GBI-EM). The index measures the performance of international government bonds issued by emerging market countries. And yet India didn’t feature in their basket or index until now. But a couple of days back, JP Morgan said 23 Indian Government Bonds (IGBs) worth about $330 billion are eligible to make it to the GBI-EM. These bonds will be eligible to be included slowly starting 28th June 2024 until they form 10% of the total index across 10 months. Now, this is a big milestone because India was the only large emerging economy which was not the part of any emerging market bond index. (Jpmorgan, n.d.)

Inclusion of Global Finance Investors

 India gets included in this index, it’s like getting a VIP pass. Global investors start noticing us, and the funds start flowing in. This means more foreign investors looking at Indian bonds, resulting in a financial boost and making it easier for the Indian government to borrow money. A lot of foreign fund managers who want to invest will start buying Indian government bonds.  Buying will also be seen from global mutual funds or exchange traded funds (ETFs) who want to take advantage of higher interest rates in emerging bond markets. Experts believe this could attract foreign capital. Even more, if other major entities like Bloomberg or FTSE Russell start including Indian government bonds in their global bond index. More funds would also mean a stronger Indian Rupee and a boost to our financial markets. All this will further attract more equity funds. Sectors like Non-Banking Financial Companies (NBFCs), which are the largest borrowers from bond markets, may experience growth due to increased fund inflows.  The banking sector will also get a piece of action because they’re required to hold at least 23% of their deposits as bonds. More investments could propel increased liquidity and action.

Investors and Traders

Staying informed and proactive is key. Diversifying portfolios, understanding market dynamics, and being flexible with investment strategies are steps in preparing for this economic transformation. Right now, the yields on U.S. government bonds are rising, which make emerging market bonds less attractive.  However, India stepping onto the global bond stage is a game-changer.

Conclusion

As we move forward, a proactive approach in understanding and adapting to these changes will empower investors and traders to make the most of this significant milestone in our financial history.