Indian Bonds to Join JPMorgan Global Bond Index: What It Means for Investors

Last week JPMorgan Chase, the New York-headquartered multinational financial services firm's global index research group, announced the addition of the Indian government bonds to its Global Bond Index- Emerging Markets index suite. This came in after a JPMorgan investor survey found that funds wanted to replace Russian debt with that of India, after the invasion of Ukraine.

JPMorgan Chase stated that the addition would happen in a staggered manner over the next ten months between June 28, 2024, and March 31, 2025.

This move has led to euphoria among the debt market participants, as it means greater inflows into the Indian debt market and better price discovery.

The Indian debt market is already the largest amongst the emerging economies. Recently, Mr Jamie Dimon, the Chairman and CEO of JPMorgan Chase, in a recent interview with the Economic Times, called this to be a sign of maturity and a great thing for the country but, also expressed it might have a huge material effect.

India has also now been included in the JPMorgan Asia Diversified (JADE) index with an anticipated weight of around 18% to 20% over 10 months. JADE provides investors with a robust, diversified benchmark that tracks local currency government bonds issued by emerging and developed Asian countries (excluding Japan).

This move is expected to strengthen the INR with foreign portfolio inflows (alongside the timely intervention of the Reserve Bank of India).

India, a major emerging market economy, has been a bright spot demonstrating robustness and is thus a promising investment destination.

But including Indian government bonds in its Global Bond Index- Emerging Markets index suite, also means that the Indian debt market may be more vulnerable to foreign portfolio flows when policy decisions and/or the ground realities of the economy aren't favourable.

Currently, the key risks are:

• Vulnerable Indian rupee compared to the greenback
• Higher international oil prices
• Upward pressure to trade deficit once again
• Worries of India’s Current Account Deficit (CAD) re-emerging
• Probability of a below-normal monsoon in 2023 for the country as a whole (owing to the impact of El Nino weather conditions)
• Risk to the inflation trajectory
• Central banks maintaining hawkish monetary policy stance
• Higher bond yields
• A Higher debt-to-GDP ratio in most economies
• Chances of economic slowdown later this year (or early 2024)
• Weak global demand
• Increase in volatility in the global financial markets
• Geopolitical tension
• And geoeconomic fragmentation

Many of these risks have been even cited by Mr Jamie Dimon in his interview with the Economic Times. He's of the view that interest rates in the U.S. may go up more given the risk to the inflation trajectory. The worst-case scenario, he expressed, is 7% with stagflation.

The International Monetary Fund (IMF) also has recently stated that many Emerging Market and Developing Economies (EMDEs) face threats to economic growth and limited policy space due to high inflation, rising debt, and balance of payments pressures. These challenges mounted during the COVID-19 pandemic and were further exacerbated by Russia's invasion of Ukraine.

The RBI too has been watchful of these factors. In the August 2023 monetary policy review meeting, the six-member Monetary Policy Committee (MPC) observed weak global demand, volatility in global financial markets, geopolitical tensions and geoeconomic fragmentation posing a risk to the economic growth outlook.

As regards CPI inflation, the RBI is seeing risk emanating from uneven rainfall distribution, sub-normal monsoon in 2023, higher food prices, international crude oil prices (owing to production cuts) and expected increase in output prices.

Against the backdrop of the above, it's pointless getting carried away with the announcement of the addition of the Indian government bonds to its Global Bond Index- Emerging Markets index. Follow a sensible and thoughtful approach.

What should your investment strategy be to invest in the Indian debt market now?

It appears that policy interest rates are likely to remain elevated for some time now. The RBI has chosen to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth. CPI inflation is still well above the RBI's comfort range. If inflation moves up, another 25-35 basis points (bps) increase cannot be ruled out.

Having said that, we are near the peak of the interest rate cycle. It is an opportune time to invest in longer-duration debt mutual funds with a medium-term view of 3 to 5 years whereby you benefit from higher yield and unlock the capital growth.

Typically, one can consider Medium to Long Duration Debt Funds, Long Duration Funds, Gilt Funds, and Dynamic Bond Funds in the current interest rate cycle by assuming slightly higher risk and keeping a time horizon of 2 to 3 years or more.

You may also consider Banking & PSU Debt Funds that typically maintain durations ranging between 2 to 5 years. This makes them moderately sensitive to interest rate fluctuations. In the current market environment, Banking & PSU Debt Funds can potentially offer stability without exposing the portfolio to undue risks. You could benefit from regular coupon payments and may employ a partial accrual strategy to mitigate volatility during rising interest rate periods. But it's important to keep an investment horizon of around 2 to 3 years.

If you can't afford to take slightly high risk and/or the investment horizon is very short (a few days, weeks or a few months), Overnight Funds, Liquid Funds, Ultra Short Duration Funds, and/or Money Market Funds could be considered.

Want to know which are the Best Debt Mutual Funds to Invest in 2023? Click here.

Remember, investing in debt funds, in general, is not risk-free. If you are unwilling to take the risk (for slightly better returns), you may go with Bank Fixed Deposits.

Happy Investing!

This article first appeared on PersonalFN here

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.