An index entry that comes with its own exits

livemint.com:

New Delhi: Late last month, a much-awaited milestone in the development of India’s financial markets was reached, when JP Morgan announced it would include a set of Indian government bonds in its widely-tracked global bond index. India’s inclusion in the JP Morgan Government Bond Index–Emerging Markets Global Diversified will happen in June 2024, and, according to estimates by analysts, could lead to inflows of $20-25 billion into the country over a year. If, as a result, India is included in other global emerging market bond indices as well, inflows could be even higher.

India’s weightage in the JP Morgan index will be the highest allowed: 10%. Around 23 Indian government securities with a notional value of $330 billion will be included in the index. These bonds are classified under the so-called ‘fully accessible route’, with no restrictions placed on the extent to which foreign investors can invest in these bonds.

Interestingly, total foreign investment in such bonds is currently only 2.8% of their total value outstanding, though this share is certain to go up as India gets included in the index. The JP Morgan bond index is ‘tracked’ by passive funds with assets of over $200 billion—their portfolios mirror that of the index in its composition and weightage. Above and beyond this, there is a large volume of funds where managers have the discretion of where to invest, but whose performance is ‘benchmarked’ to the index.

So the $20 billion could just be the start. India’s inclusion comes at a time when foreign investment in Indian government bonds is actually still well below pre-covid pandemic levels (see chart 1). Talk that India would be included in the index has been around for some time.