JP Morgan to include India's 10-year bond in its index; what does it mean for bondholders?


JP Morgan to include India's 10-year bond in its index; what does it mean for bondholders?

September 19, 2022
JP Morgan to include India's 10-year bond in its index; what does it mean for bondholders?

Recently, JP Morgan announced the inclusion of India's 10-year bond in its index.  Morgan Stanley mentioned that it sees a "good chance" for JP Morgan to include the bond and has recommended going long on the bond yield. 

Strategists Min Dai and Madan Reddy said in a note, "We now believe that there is a very good chance that JPM will announce the index inclusion of India's bond market in mid-September." They also added," We recommend to position for a strong INR and lower G-Sec yields tactically. We like to add a short EUR/INR limit order and long 10-year G-Secs, targeting 25bp lower from here."

However, the inflow can take nine to twelve months and might be seen by July or September 2023. Currently, the India 10 years Government Bond yields 7.142%.

What are Indian Government Bonds? 

Indian Government Bonds are the bonds issued by the Central and State Government of India. 

Government bonds are agreements between the issuer and the investor that include guarantees from the issuer regarding interest payments on the face value of the bond held by the investor and the timely repayment of the principal.

Investors' demand for a certain yield when lending money to governments reflects expected inflation and the chance of repayment.

There are different types of Government Bonds, which are as follows:

  • Fixed-rate bonds: As the name suggests, these bonds have fixed rates irrespective of the fluctuations in the market rates.
  • Floating rate bonds: There are periodic changes in the rate of return in such kinds of bonds. The rate change happens at an interval declared before the bond is issued.
  • Sovereign gold bonds: These bonds are issued by the Central Government wherein the entitled can invest in gold without buying physical gold. The interest that is earned on these bonds is exempted from tax.
  • Inflation index bonds: These bonds offer principal and coupon payments with inflation protection. Whole Sale Price Index (WPI) or Consumer Price Index are two options for the inflation index used in these bonds.
  • 7.75% GOI Savings Bonds: These bonds can be held by (i) Individuals who are/are not NRI(s) in any capacity, (ii) Minor with a legal guardian representative, and (iii) Hindu Undivided families. 

Some of the advantages of Government Bonds are as follows:

  • Government bonds are a regular source of income for the investor because the interest earned is paid out every six months to the bondholder.

  • Government Bonds promise stability and assured returns. These bonds are a government's promise to repay the liability on time.
  • They are less risky as compared to other investment options like equity.
  • It can be a great option for an investor to diversify the portfolio as they are very stable.

With JP Morgan's news about the inclusion of India's 10-year bond, the Indian bonds will likely rise.  The bondholders can take a position before the actual inclusion as there is a projected influx of $3 billion every month. 

The announcement is anticipated in the fourth quarter of this year. In the second or third quarter of 2023, according to Goldman Sachs Group Inc., Both predict that India will have a 10% weight in the index, the most allowed for a nation, and that the change might result in $30 billion in inflows.

The third-largest economy in Asia with a $1 trillion debt market would be more accessible to foreign investors if high-yielding Indian sovereign bonds were included in global indices.According to Morgan Stanley, the bond market would attract $18.5 billion annually and will push foreign ownership to 9% at the end of 2032.

As per Nivedita Sunil, portfolio manager for Asia and EM debt at Lombard Odier (Singapore) Ltd, "India would offer much-needed diversification to the GBI-EM index given the different structure of its economy, and so would be a strong addition to the index from a long-term perspective."

The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are thorough benchmarks for emerging market debt that follow local currency bonds issued by governments in emerging markets.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do’s and Dont’s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Brokerage will not exceed the Exchange prescribed limit.

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!