'Hot Money' Expected In Indian Sovereign Debt Ahead Of Formal Inclusion In JP Morgan's Emerging Markets Index

'Hot Money' Expected In Indian Sovereign Debt Ahead Of Formal Inclusion In JP Morgan's Emerging Markets Index

India is scheduled to receive billions of dollars in foreign investment when JPMorgan includes the sovereign debt of the nation in its emerging markets index on Friday. However, this inclusion will make India more susceptible to erratic inflows of 'hot money.'

Vikrant DurgaleUpdated: Thursday, June 27, 2024, 09:55 AM IST
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Reuters

India is scheduled to receive billions of dollars in foreign investment when JPMorgan includes the sovereign debt of the nation in its emerging markets index on Friday. However, this inclusion will make India more susceptible to erratic inflows of 'hot money.'

India's inclusion is the most recent step to open up a once-closed market and represents the first time the bonds of the largest economy in the world with the fastest rate of growth have been included in a major benchmark. Only in 2020 did India lift the ban on foreign ownership of certain debt denominated in rupees.

Government Securities in JP Morgan's index

According to JPMorgan, the addition of 28 government bonds totaling more than USD 400 billion will give India a 10 per cent stake in the closely watched measure.

As investors position themselves ahead of the formal inclusion, approximately USD 11 billion has poured into Indian bonds, according to reports.

As the bonds are progressively added to the index over the course of the next ten months, the bank anticipates an additional USD 30 billion, increasing foreign ownership from approximately 2 per cent to approximately 5 per cent.

Timing of inclusion

After years of discussions between the Indian government, banks, and investors, the entry marks the end of the country's efforts to improve bond tradability and reduce onerous administrative controls.

Weeks after investors praised Prime Minister 'Narendra Modi' for his market-friendly reforms, the Bharatiya Janata Party lost its parliamentary majority, making him dependent on coalition partners. This addition has now occurred. Although the impact of the shocking election result was initially temporary, it led to an increase in Indian yields and a decrease in stock prices.

The goal of the Indian government is to lower its fiscal deficit to 4.5% by March 2026, with the government's finances being less at risk due to a recent large dividend from the central bank.

In the meantime, shorter-term bond sales occurred earlier this year as a result of an increase in U.S. yields and a fall in the value of the Indian rupee.

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