India’s inclusion in JP Morgan’s bond index to bolster rupee and attract foreign investment

JP Morgan Chase (NYSE:) & Co’s recent announcement to include Indian government bonds in its emerging markets bond index from June 2024 is expected to bring substantial benefits to India’s economy, including a boost for the Indian rupee and an influx of foreign investment. The announcement aligns with India’s economic aspirations of achieving a $5 trillion economy and positions the country as an appealing investment destination amid global economic changes.

Analysts estimate that the inclusion could attract about $25 billion in foreign investment into India’s government securities market due to factors like yield and market stability. Additionally, experts predict passive inflows could amount to around $26 billion as a one-off stock adjustment over the scale-in period, with active flows potentially bringing in at least another $10 billion. In total, this could result in inflows of over $40 billion into India’s fixed income markets over the next 1.5 years.

The influx of foreign investment is expected to lower borrowing costs for the government, strengthen the rupee, and improve India’s credit rating. It can provide a substantial source of funding for essential infrastructure projects such as building roads, bridges, schools, and hospitals, and reduce the country’s current account and fiscal deficits.

However, managing liquidity and potential volatility in the Indian bond market and currency exchange rates will be important challenges to address. Fiscal and monetary policies will need to be responsive to global perceptions and market dynamics to mitigate potential inflationary risks.

The inclusion of Indian bonds is also expected to increase demand for the rupee, potentially leading to a nominal appreciation of the currency. The Reserve Bank of India is likely to absorb some of the dollar inflows and ensure competitiveness of exports while providing the rupee a cushion against a multi-year ascent in US bond yields and hardening prices.

India’s inclusion in JP Morgan’s index reflects its growing importance as a market for global investors, especially as they seek alternatives to China and other emerging markets. It positions India as one of the best-performing economies, boosting foreign portfolio investments and enhancing its global economic stature.

Traders are now hopeful for a similar announcement by the Bloomberg Global Aggregate Index in the coming months, which could further boost inflows into India. The inclusion will be phased in gradually over a 10-month period, concluding on March 31, 2025, ensuring a smooth transition into the index.

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