“This could serve to lower funding costs slightly, and support further development of domestic capital markets, but direct positive effects on India’s credit profile will be marginal in the near term,” the report stated.
The inclusion in the index is likely to facilitate $24 billion of inflows between June 2024 and March 2025, with India expected to account for a maximum weight of 10% of the index.
JP Morgan GBI-EM comprises 23 bonds with a total value of $330 billion.
“We expect the positive effect on the sovereign rating of India’s inclusion in the JP Morgan Global Bond Index-Emerging Markets (GBI-EM) to be small, especially in the near term, as its impact on fiscal credit metrics is unlikely to be significant,” the report further stated.
However, it did note that flows could be greater if other indexes also included Indian government securities.
Experts indicate that an inclusion in Bloomberg Global Aggregate Index could bring in another $15 billion in passive flows.“The resulting increase in foreign investor holdings of central government maturities is likely to be large – they accounted for only around 1.6% ($19 billion) of the market as of Q2-2023, including about $12 billion of the bonds issued under the fully accessible route (FAR),” Fitch noted, highlighting that the impact of foreign investors in debt pricing is likely to be limited.
Fitch was of the view that the move could stimulate further capital market development.
But the rating firm did warn that unless the country improved its fiscal metrics, the move could make sovereign financing costs more vulnerable to volatility in international markets and sentiment.
“The vulnerability of India’s sovereign financing costs to external drivers is currently quite limited… but could increase over time if non-resident holdings of government securities were to rise significantly and the fiscal metrics remain weak,” Fitch noted.
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