On behalf of the Indian government, the Reserve Bank of India (RBI) issues Indian government bonds (IGBs). These bonds provide a route for the government to get money to fund its fiscal deficit and other developmental projects.
The J.P. Morgan emerging bond index has begun to include Indian government bonds from June 28, 2024. Nonetheless, this process will continue until March 2025, which will span ten months.
The article examines the recent incorporation of Indian government bonds (IGBs) in J.P. Morgan government bond index-emerging markets (GBI-EM).
Also read: Exploring the bond market for beginners
What is the JP Morgan bond index?
J.P. Morgan has consistently been a pioneer through its development and research work related to prominent indices linked to emerging markets investment interests. After the first Brady bond was issued, the J.P. Morgan emerging bond market index (EMBI) was established in the early 90s. It then became the most published and cited index of its type.
More recently, J.P. Morgan bond index India launched two new series – government bond index-emerging markets (GBI-EM) series and J.P. Morgan corporate emerging markets bond index (CEMBI), leading investors towards higher yielding local rates under both these benchmarks have rapidly become industry standards for local market as well as corporate EMs respectively.
Moreover, regionally specific indexes such as the J.P. Morgan Asia Credit Index (JACI), the Latin America Eurobond index (LEI), and the Russia bond index (RUBI) are also covered under the J.P. Morgan global government bond index.
Eligible Indian government bonds
The indices will only include Indian government bonds issued through the fully accessible route (FAR) of the Reserve Bank of India. These bonds must have a minimum outstanding amount greater than $1 billion and a minimum maturity date of 2.5 years. These are all FAR-designated IGBs which are maturing after December 31, 2026.
Must read: Government bonds in India – Meaning, types and features
Impact of India’s inclusion on financial flows
Around $10 billion worth of securities have already been purchased by foreign investors eligible for inclusion, which would be positive. However, FPI currently holds around 2.4% of the outstanding Indian govt bonds, which will rise over the next year as staggered inclusion commences.
Since the inclusion announcement, different global funds have started increasing their holdings on longer-tenured maturity bond issues. Maximum increase was seen in the 6Y to 10Y segment, and it has been consistently declining during these periods, holding in short-term securities by them.
How will this impact the Indian rupee and the borrowing costs?
The reserve bank is ready to manage the inflows hence market participants do not predict that the rupee will be affected negatively. A senior fund manager at Shriram AMC, Deepak Ramaraju, projects a 2% annual gain in the value of Indian rupee relative to other currencies. Reduced borrowing costs and a stable macroeconomic climate may be advantageous to smaller banks.
The bond market integration in India is expected to have wider implications such as improved debt sustainability and more capital access for Indian firms. Ramaraju claims that this inclusion could result in a structural surplus in India’s balance of payments, which would promote more affordable capital and economic expansion.
What to expect next?
In March 2024, Bloomberg declared that starting in January 2025, India would be included in EM Local Currency Government Indices.
These inclusions will probably encourage significant overseas investments, reduce borrowings and release internal funds for infrastructure projects, according to HDFC MF. “As India enters the global financial space, it must improve project readiness and adhere to sound economic policies if it wants to fully exploit these opportunities as well as remain watchful of global economic cycles,” said the report.
Further reading: Corporate bond – definition and how they’re bought and sold
Bottomline
The inclusion of Indian Government Bonds (IGBs) into the J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) is a critical step forward in India’s financial landscape.
Sustainable utilisation of these opportunities will require simultaneous negotiation of complexities in global finance and promoting an environment conducive to growth and development in India.
FAQs
- How do you apply for government bonds?
Several ways exist for people to buy government bonds offered by India. One is directly through the Reserve Bank of India (RBI) Retail Direct platform, where individuals can open an account and buy the bonds themselves. Another way is to purchase them via particular banks or stock exchanges such as NSE and BSE. People may also invest by participating in RBI-conducted auctions for government securities which they will do through a bank or broker.
- Is it safe to invest in Indian bonds?
Generally, investment in Indian government bonds is seen as safe because they have a sovereign guarantee from the Indian government, which would be required to repay both principal amounts together with interest rates, thus minimising default risks. Nevertheless, caution should be taken regarding interest rate risk; inflationary risk and liquidity risk which influence market value and returns on bonds. All in all it offers low risk for those conservative investors looking for some kind of security.
- Are government bonds tax-free?
Government bonds in India do not enjoy complete tax exemption. As per the Income Tax Act 1961, interest earned on government bonds is subject to taxation and must be included in income. Nevertheless, there are some kinds of bonds such as tax-free bonds issued by public sector enterprises which pay interest without attracting tax. In addition, capital gains arising out of some government securities may also be taxable.
- Can I buy government bonds directly?
Yes, retail investors can purchase government bonds directly via various platforms. These include primary auctions conducted by the Reserve Bank of India (RBI), where first issuance takes place, and secondary markets, where previous issues are traded. At stock exchanges, government securities can also be availed, while there are selected banks and online platforms offering them. Additionally, mutual funds or exchange-traded funds (ETFs), which focus on fixed-income instruments, provide opportunities to invest in government securities.
- How to buy NHAI bonds in 2024?
To purchase NHAI bonds in 2024, follow announcements by NHAI or financial institutions on availability. Make sure that you have been KYC-compliant and carry a valid PAN card. Buying options might range from direct purchases from NHAI to designated banks or online platforms. Minimum investment limits must be followed together with other procedural guidelines given by issuers/intermediaries. Stay up-to-date about bond performance plus financial disclosures for effective investment management.
