What is the JP Morgan index inclusion?
JP Morgan, one of the world’s leading financial services firms, announced on September 21, 2023 that it will include Indian government bonds in its emerging market (EM) bond index from October 1, 2023. This is a significant development for India, as it will attract more foreign portfolio investors (FPIs) to invest in the Indian debt market, which is the third-largest in Asia.
The JP Morgan EM bond index is a widely followed benchmark for EM debt, with an estimated $340 billion of passive and active funds tracking it. The inclusion of Indian bonds will increase the weight of India in the index from zero to 10.2%, making it the second-largest constituent after China. This will also boost India’s sovereign rating and lower its borrowing costs.
How will this benefit the Indian banks and FIs?
The JP Morgan index inclusion will create a huge demand for Indian bonds from FPIs, who can invest up to $140 billion in the Indian debt market under the current limit. According to JP Morgan, the inclusion could result in an inflow of $20 billion to $30 billion over the next year. This will provide ample liquidity and lower interest rates for the Indian banks and FIs, who are the major issuers and buyers of bonds in the domestic market.
To take advantage of this opportunity, several banks and FIs have lined up to raise funds through non-convertible debentures (NCDs) and bonds on Monday and Tuesday. They plan to raise Rs 18,000 crore by issuing these instruments, which offer attractive yields and tenures for investors. Some of the prominent issuers are:
- National Bank for Agriculture and Rural Development (NABARD): The development bank plans to raise up to Rs 3,000 crore by issuing social sector bonds on Tuesday. These bonds will have a tenure of 10 years and a coupon rate of 6.65% per annum. The proceeds will be used for lending to rural infrastructure and social sectors.
- State Bank of India (SBI): The country’s largest lender plans to raise up to Rs 5,000 crore by issuing Basel III compliant Tier II bonds on Monday. These bonds will have a tenure of 15 years and a coupon rate of 6.8% per annum. The proceeds will be used for augmenting the bank’s capital adequacy ratio.
- HDFC Bank: The private sector bank plans to raise up to Rs 5,000 crore by issuing perpetual bonds on Monday. These bonds will have no maturity date and a coupon rate of 7.25% per annum. The proceeds will be used for meeting the bank’s growth requirements.
- Power Finance Corporation (PFC): The state-owned power sector financier plans to raise up to Rs 3,000 crore by issuing secured redeemable NCDs on Monday. These NCDs will have a tenure of 10 years and a coupon rate of 6.79% per annum. The proceeds will be used for funding power projects.
- Indian Railway Finance Corporation (IRFC): The financing arm of the Indian Railways plans to raise up to Rs 2,000 crore by issuing taxable bonds on Tuesday. These bonds will have a tenure of 10 years and a coupon rate of 6.68% per annum. The proceeds will be used for financing railway projects.
What are the challenges and risks involved?
While the JP Morgan index inclusion is a positive development for the Indian debt market, it also poses some challenges and risks for the issuers and investors. Some of these are:
- Exchange rate risk: The FPIs who invest in Indian bonds will be exposed to the fluctuations in the exchange rate between the rupee and their home currency. If the rupee depreciates against their currency, they will incur losses when they convert their returns back to their currency.
- Regulatory risk: The FPIs who invest in Indian bonds will have to comply with the regulatory norms and limits imposed by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). These norms and limits may change from time to time, affecting their investment decisions.
- Liquidity risk: The Indian bond market is not as liquid as some of the other EM bond markets, such as China or Brazil. This means that there may not be enough buyers or sellers for a particular bond at a given time, affecting its price and yield.
- Credit risk: The issuers of bonds may default on their interest or principal payments due to various reasons, such as financial stress, operational issues, or legal disputes. This will result in losses for the investors who hold these bonds.
