We all are gung-ho about India’s inclusion in the JPMorgan Emerging Market Bond Index, and rightfully so. This is our ‘1994 moment’, when Indian equity debuted on the MSCI Emerging Market Index.

A large bond market like India should have been part of the JPMorgan index much earlier, but the Western world’s biases prevented it. Representations for India’s inclusion started more than a decade ago—the initiative being taken by the then Union finance minister. Subsequent to a regime change at the Centre, the representations continued. But JPMorgan had certain ‘conditions’, or at least expectations, for including Indian government bonds in its widely tracked index. One was that there should not be any ceiling on how much foreign portfolio investors (FPIs) could invest in Indian bonds. Another expectation was for favourable tax treatment over domestic investors. JPMorgan also wanted Indian government bonds to be part of the Euroclear system, for operational familiarity. The Indian government hasn’t accepted any of these conditions. No favourable tax treatment has been granted to FPIs. This is justified as the fiscal deficit is funded by domestic investors, and FPIs, for a small piece of the pie, need not be given any favourable treatment. The context of inclusion in Euroclear can be debated, but our domestic operational and settlement systems are robust, and FPIs should not have any issue. The issue of the ceiling on FPI investments was managed differently. While the overall ceiling for FPIs remains, certain government securities (G-Secs) have been designated under ‘Fully Accessible Route’ (FAR). In these particular G-Secs, FPIs can invest without any limit.
A no-concessions victoryThere was a to-and-fro happening on whether India should grant these conditions. Then came a game-changer. The Russia-Ukraine war began in February 2022. Western nations imposed sanctions on Russia, the US forfeited its money, and Russia was dropped from bond indices as Western nations would not invest in the country. There was a need for another country to fill the spot. And India fit the bill. There are three bond indices in the context of this discussion. Indian government bonds were included in the JPMorgan emerging markets index on 28 June, and India’s weight in it will move up to 10% by March 2025. India will be included in the Bloomberg index in January 2025, but the number of global funds following this index is relatively lower. The other one is the FTSE Russell, but it does not currently include Indian government bonds. The JPMorgan index inclusion is a moral victory for India because no concession was granted on favourable tax treatment or listing of Indian government bonds at a foreign exchange or clearing system. The index providers had these conditions or expectations, but now we know they are flexible. The FAR route is a roundabout way of managing the issue of a ceiling for FPI investments.
An attractive marketFor investments in Indian government bonds, or corporate bonds, the yield levels are attractive. The 10-year yield on Indian government securities is about 7%. Among developed nations, the 10-year yield on US securities is about 4.35%, and on German bonds about 2.49%. But among emerging, or comparable, markets, India fares better. The 10-year yield on South African securities is 10.2%, on Indonesia’s is 7.17%, and on Brazil is 12.3%. These are more-or-less the only comparable markets. Turkiye or Pakistan government bonds offer higher yields, but these countries are not comparable to India as their risk levels are higher. FPIs consider not only the bond yield levels but also the currency hedging cost. While India’s currency does weaken against the US dollar, it is relatively stable, and the pace of depreciation is slower than earlier. The currency hedging cost is also lower than earlier. From investors’ perspective, India’s global standing is better than earlier. In equities, in the MSCI EM index, India’s weight has improved to 18.3%, while China’s has dropped to 25.4%. To be sure, Indian markets are domestic-driven. Foreign flows are relevant, but not a game-changer.