Will India Join Global Bond Indices? 'Very Good Chance', Says Morgan Stanley

There is a very good chance that JPMorgan will announce index inclusion of India's bond market in mid-September, according to Morgan Stanley.

"After the visit to India in July and talking to officials, we felt that the government is still open and keen to have the index inclusion," Morgan Stanley's Asia Strategists Gek Teng Khoo, Min Dai and Madan Reddy wrote in a note dated Sept. 2.

They said the JPMorgan index team has been collecting feedback from global investors in the past two months. "There are two key takeaways—the index team now has more incentive to include India on the back of Russia's exclusion; and most emerging markets government bond investors either support or don’t object to the inclusion."

In the index review last October, India was put on the watch list as 60% of investors supported the decision. But JPMorgan had said India needs to improve market access, trading and settlement to achieve index inclusion. "It mentioned that achieving Euroclear could improve market access significantly. While India made some progress in the past 10 months, we don’t feel that this is material enough to change the overall assessment."

What changed after that, however, was Russia's exclusion. "Russia, a country with close to 8% weight, was excluded from the index. The result is that now seven countries in the GBI-EM index have 10% weight: China, Indonesia, Thailand, Malaysia, Brazil, Mexico and South Africa. This makes the index quite unbalanced... Hence, JPMorgan has more incentive to include India, even without Euroclear, as long as emerging markets government bond investors don’t object to that."

Mid-to-late September is likely to be the time for India's inclusion, according to Morgan Stanley.

Also, taking into consideration the time it takes to set up FPI accounts, the lead time in India's case could be 9-12 months, which means that the actual inclusion could start in June or September 2023.

Currently, there are 20 bonds in the fully accessible route list and they will be eligible for the actual inclusion. Total outstanding is $263 billion. "We assume that the monthly increase of FAR list bonds is $10 billion in the next 12 months. This would suggest that the eligible bonds would be about $360 billion in the second half of 2023, making it the second-biggest bond market after China in the index. As a result, India would join the 10% club with China and Indonesia."

The other current 10% countries such as Thailand, Malaysia, Brazil, Mexico and South Africa would see their weight drop. The biggest decrease would happen in Thailand (-1.4%), Poland (- 1.4%), South Africa (-1.3%), the Czech Republic (-1.0%) and Brazil (-0.8%), Morgan Stanley said.

The assets under management tracking the JPMorgan Government Bond Index-Emerging Markets is about $300 billion. "Hence, 10% in India will attract $30 billion of inflows versus current foreign ownership of $17.8 billion."

Monthly inflows of $3 billion, according to Morgan Stanley, would start in the fourth quarter of 2023, spanning over 10 months until the second quarter of 2024.

The research house also said that though the inclusion announcement doesn't trigger inflows yet, it could improve sentiment. "We recommend to position for a strong rupee and lower government securities yields tactically. We like to add a short euro/rupee limit order and long 10-year government securities, targeting 25 basis points lower from here."

"The bond yield has been moving lower on the back of a hawkish RBI and stabilised inflation. We expect yields to be lower should the announcement happen as investors have not positioned for that."