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JP Morgan’s Global Bond Index

Published: 28th Sep, 2023

Context

Under a significant move, the JP Morgan Co. is going to add Indian government bonds (IGBs) to emerging markets index in June 2024 which will likely to attract 25 billion dollars foreign investments.

 

The Reserve Bank of India (RBI) has been engaging with other index providers, including FTSE Russel and Bloomberg-Barclays, for the inclusion of IGBs in global bond indices.

About the update:

  • India, which will be included in the GBI-EM Global index suite starting June 28, 2024, is expected to reach the maximum weight of 10 per cent in the GBI-EM Global Diversified Index (GBI-EM GD).
  • Currently, 23 Indian government bonds with a combined notional value of $330 billion are index eligible.
  • Inclusion of the bonds will be staggered over 10 months through March 31, 2025 (i.e., inclusion of 1 per cent weight per month).

GBI-EM Global index:

  • The GBI-EM (Government Bond Index-Emerging Markets) is a global bond index maintained by JP Morgan.
  • It is designed to track the performance of government bonds issued by emerging market countries.
  • These bonds are denominated in various currencies, including the US dollar and local currencies of the respective countries.
  • Criteria for inclusion: Bonds included in the index must meet certain criteria set by JP Morgan, including minimum outstanding issue size, liquidity, and credit quality standards.
  • These criteria ensure that the index represents relatively liquid and investable bonds.
  • It serves as a reference point for measuring returns and risk in this asset class.

What are Indian Government Bonds (IGBs)?

  • Indian government bonds, also known as G-Secs or Government Securities, are debt instruments issued by the Government of India to raise funds for various public expenditure and developmental projects.
  • The issuer of Indian government bonds is the Government of India through the Reserve Bank of India (RBI) acting as its agent.
  • These bonds are primarily issued to finance fiscal deficits, infrastructure development, and various government programs. They are a crucial source of capital for the government.
  • Types:
    • Indian government bonds come in various tenures, ranging from short-term (Treasury Bills) to long-term (Government Dated Securities or G-Secs).
    • The most common G-Secs have maturities of 5 years, 10 years, and 30 years.
  • These bonds pay periodic interest to bondholders, typically semi-annually. The interest rates are determined through auctions and can be fixed or floating.
  • Indian government bonds are actively traded in the bond market.
  • They are listed on stock exchanges, and investors can buy and sell them in both the primary and secondary markets.

Impacts on Indian Economy:

  • Tendency for the currency to appreciate.
  • Increase in capital inflows into India.
  • Demand for investors to buy Indian government bonds denominated in Rupee will increase.
  • Increase in foreign portfolio investments (FPI).
  • Can lower inflation compared to other economies.

Concerns:

  • Currency appreciation and the demand from investors for Indian government securities can imbalance Rupee competitiveness.
  • Rise in sensitivity of domestic policy to external spillovers.
  • Destabilize Rupee

 

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