IGB inclusion in JPMorgan Index to enhance FPI participation in markets
markets bond index starting June 2024. Although such indices have been around for a long time, IGBs were not part of them due to a variety of reasons.
However, since 2013 — when the idea of index inclusion was first floated — the Indian authorities have made steady progress in facilitating foreign investment into IGBs.
The announcement of IGBs inclusion in JP Morgan's GBI-EM Global Diversified (GBI-EM-GD) Index is an acknowledgement of that progress from the global investors.
Moreover, inclusion in one such index increases the likelihood of inclusion into bond indices managed by other index providers such as Bloomberg and FTSE as well. Index inclusion bring both advantages, and responsibilities to IGB market and policymakers.
How Index inclusion helps?
This event is important to various stakeholders of the IGB market. First, it will enhance the foreign portfolio investor (FPIs) participation in the IGB market. FPIs currently own only 1.7% of IGBs outstanding despite its market size of $1.2 trillion.
FPIs tracking a bond index tend to allocate their assets under management nto various markets contained in the index, and rarely into other markets. So, index inclusion will aid FPI inflows into IGBs. As a result of inclusion in GBI-EM-GD index, the estimated inflows into IGBs are $20-25 billion by March 2025.
The inflows could further increase by $15-20 billion if other index providers also announce inclusion into their respective indices.
Secondly, from the Indian government's perspective, fresh inflows would help finance India's relatively wide fiscal deficit which in recent years has seen increased capital expenditure. Likewise C/A balance will also benefit during the phase of portfolio inflows. A well-diversified
