India’s Inclusion In JPMorgan Bond Index To Have Marginal Impact In Near Term: Fitch

India's joining JPMorgan's Emerging Market Global Bond Index could lower funding costs and support the development of domestic capital markets, but direct positive effects on India’s credit profile will be marginal in the near term, Fitch Ratings Inc. said.

According to Fitch, India’s high government debt and interest/revenue ratios are weaknesses in its credit profile. The effect of JP Morgan index inclusion will be small in the near term "as its impact on fiscal credit metrics is unlikely to be significant," it said in a Sept. 27 note.

The inclusion of Indian bonds in the JP Morgan index begins in June 2024 with a weight of 1%, increasing 1% each month until it reaches 10% by April 2025.

The agency expects inclusion in the indexes could facilitate about $24 billion in passive inflows between June 2024 and March 2025 into India's government bond market. Overseas investors currently account for 1.6% ($19 billion) of the market as of the second quarter of 2023.

The resulting increase in foreign investor holdings of central government maturities is likely to be large; however, they will still represent a fairly small share of overall holdings, which can limit their influence on debt pricing, Fitch said.

"A more diverse investor base could reduce crowding-out risks: if the government becomes less reliant on financing from domestic financial institutions, it could give them greater leeway to provide credit to the private sector. It could also stimulate further capital-market development," the agency said.

India's vulnerability to external drivers in sovereign financing costs could rise over time if non-resident holdings of government securities were to rise significantly and the fiscal metrics remain weak, Fitch said.

The rating agency expects increased exposure to foreign investor sentiment could encourage the government to "pursue policies consistent with macroeconomic stability and fiscal prudence, benefitting the sovereign’s credit profile over the longer term."

Although Fitch cited other examples of countries in the index not fulfilling such objectives, it doesn't expect India’s fiscal policy approach to be affected significantly.

Post-inclusion into the JP Morgan GBI-EM indexes, India is set to become the second-largest emerging-market country in the index after China, bringing Asia's contribution to the index to approximately 50%.

Earlier this week, Morgan Stanley said it expected greater foreign participation in India's bond market would have a favourable impact on India's macro-economic ndicators—a  rise in balance of payments surplus, a reduction of external funding pressures on the currency, and an increase in liquidity.

It had also highlighted key risks like volatility in global commodity prices, such as oil, deterioration in domestic fundamentals, i.e., high inflation or a slowdown in growth, uncertainty in the political environment, and a slowdown in reform momentum.