JPMorgan Is Adding India To Its Emerging-Markets Bond Index
Transcript
00:00 Good morning and thanks so much for tuning in.
00:02 You're watching BQ Prime.
00:03 If you've been following this platform over the last couple of hours, you will have gotten
00:09 the biggest headline this morning, and that is that Indian government bonds will soon
00:16 be included in an index that is run by JP Morgan.
00:20 This has significant implications for capital flows into the country, and we'll talk about
00:26 all of those implications on this conversation.
00:30 I'm joined by Anandya Banerjee, who's the Associate Vice President, Currency Derivatives
00:35 at Kotak Securities.
00:36 Anandya, thanks so much for joining in.
00:38 And just so my viewers are all on the same page, this has been in the works for some
00:43 time, I believe since 2020 onwards.
00:47 Why has it taken so long, and why is it coming to pass now?
00:51 Right.
00:52 Thank you for having me.
00:54 See, actually, there were a couple of teething troubles because India was insisting on a
01:01 rupee clearing, and the index providers were insisting on a Euro clearing.
01:08 Now, we are not sure whether that thing has been sorted out.
01:11 Of course, it seems it has.
01:13 Now, which one they have opted for, we have to see.
01:17 But I think once that has been sorted out, and plus the exclusion of Russia from the
01:23 index, that played a big part.
01:25 And now we are hearing news of Egypt going out of the index.
01:31 So all those things basically created the opportunity for India to become a part and
01:38 go for the maximum weight, which is 10% of the index.
01:43 A couple of things have been mentioned in that statement by J.P. Morgan.
01:48 One is that 23 bonds worth $330 billion are eligible for this inclusion.
01:57 And this is under what is being called the fully automatic route.
02:02 What is the significance of that FAR?
02:07 Because this is what came into pass, I think, in 2020.
02:10 Right.
02:11 So in fact, this FAR was enacted keeping the inclusion in mind, that it will not be subjected
02:19 to the limits which is there on the, or rather say sublimits on investment, which one faces
02:27 when they invest in the Indian government bonds.
02:29 So it's more of a completely open kind of a route where an investor can come in.
02:36 There are no limits on the time frame up to which they can hold because it's extremely
02:42 important that the passive funds, the ETFs, let's say, who are tracking these indices,
02:49 they can get a free in and out.
02:52 And that's what this FAR offers.
02:54 Okay.
02:55 So but the most important question to my mind is how much money will flow in.
02:59 It will start in June of 2024.
03:02 June 28 is that day of inclusion.
03:05 And they've said that every month, there will be a 1% increase in the weightage.
03:11 What are the implications?
03:12 I'm hearing estimates anywhere between $22-$23 billion, all the way up to $30 billion.
03:19 And over what time does that flow in, Anantya?
03:22 Right.
03:23 So currently around $230-240 odd billion is tracking this JP Morgan bond index.
03:31 So if we take out 10% as the maximum weight, we get a number close to $25 billion.
03:38 Some are putting it at $30, some are even going as optimistic as $40.
03:42 But we have to understand there are three kinds of money which comes in.
03:45 This $25-$240 is the passive funds, the ETFs, etc., which will happen once the inclusion
03:53 starts from summer of 2024.
03:57 And it will happen over 10 months.
03:59 But then there is active money.
04:01 So which means the active fund managers who invest in the bonds, who don't track the index.
04:05 So they would like to front-run.
04:07 And we have already seen some of that money come in.
04:10 For example, if you look at the data, the Clearing Corp data of 2023, close to $3 billion
04:19 has already come in.
04:20 So this money has come in anticipating that some kind of inclusion may happen by the end
04:26 of this year.
04:27 And the bet turned out to be right.
04:30 So that kind of money can come in.
04:31 That is the second source.
04:33 And third are carry traders.
04:34 Carry traders are people who basically invest in the currency.
04:40 They sell the dollar, they buy the rupee through the forward or the futures in the NDF, in
04:46 the onshore.
04:47 And they like to make quick gains from the acquisition of the Indian rupee.
04:52 So these three kinds of flows can benefit the bond, the currency.
04:57 The immediate ones are the active money and the carry traders.
05:01 The passive has to wait for next year.
05:04 OK.
05:05 Now, we've just seen market open while we were speaking on.
05:09 And then the reaction is instantaneous.
05:12 We I think saw towards the end of trade yesterday 5-6 basis point reduction in the 10-year benchmark.
05:20 And we've seen another 7 basis point reduction.
05:23 So we're at 7.09 very, very quickly from that 7.2 mark.
05:28 What do you make of this short-term reaction?
05:31 See, today there will be exuberance.
05:34 A couple of days it will be.
05:35 But we should not be ignoring the fact that the global cues are very challenging.
05:41 Because oil prices have started to inch towards the 100 mark.
05:44 And India being a major importer of oil, that would hurt us.
05:49 And it would also have an impact on the fiscal and the inflation.
05:52 And second point is that globally, the yields are rising.
05:56 For example, in US, the Treasury bond yields are at the highest level since 2007.
06:00 The real yield on the dollar is also at the same level, highest since 2007.
06:07 So all these things means that there is a natural pull of money out of emerging markets
06:12 into US.
06:13 The global growth outlook is very challenging.
06:17 We know the issues with China.
06:19 So there are enough concerns on the global front.
06:21 Yes, this is a very positive news for the Indian rupee and the bonds.
06:24 But we may not see the reaction last beyond a couple of days.
06:30 So yes, this exuberance would be there today, maybe the early part of next week.
06:35 I then think the global factors will start weighing in.
06:38 Okay, fantastic.
06:39 So, and you were pointing out the US Treasury yield 4.5% on the 10-year, not something that
06:44 you see or have seen in fact in the recent past.
06:48 But to the flows, and if it's anywhere between that $23 to $30 billion, it's still very significant
06:56 on India.
06:57 What would it mean for, say, a couple of factors here.
07:01 What would it mean for other inclusion into other indices now that one has already been
07:07 announced and this is a major one at that?
07:10 And what does this mean from the perspective of matching the government supply?
07:14 It's good news for the government's finances and the exchequer in fact, right?
07:20 Absolutely, absolutely.
07:21 Because it creates an additional demand.
07:24 And that is a, I won't say a sticky demand, but it is nevertheless not as fickle as equity
07:29 flows.
07:30 So it is a good news because there are times when there are outflows from an index because
07:38 these are ETFs, right?
07:39 They can bring the money in and they can take the money out.
07:43 But for India, that's not going to be a problem of an outflow because we are not in yet.
07:47 So at least till, let's say 2025, we will enjoy the flows in a big way.
07:52 And so it definitely creates a major bid on the Indian government bonds.
07:59 And it will also bring in demand from the domestic guys because they will anticipate
08:04 that there is a strong bid from the foreigners.
08:07 And overall, it's a very positive thing for the Indian government bond prices and also
08:12 for the rupee.
08:13 But as I said, the rupee tends to be also impacted by other factors.
08:17 So the impact will not last until and unless the global situation improves significantly.
08:23 But then are you opening the doors to volatility down the road or is that something that you
08:28 shouldn't worry about?
08:30 The reason I'm asking is that you have now more participants.
08:33 Could you put that in perspective for us, Anand?
08:35 What is the kind of inflows that you see in the bond market?
08:38 We speak about FII's inflows into equity more often, I think, than we speak about the bond
08:43 market.
08:44 So how will that participation increase?
08:48 So if you look at the data of the inflows, the last time there was a major, major inflow
08:57 in the Indian government bonds was in 2017.
09:00 I think close to 23, 24 odd billion dollars had come in.
09:03 Since then, the bond market has not seen much outflows because of various factors, COVID,
09:10 trade war, etc., etc., inflation spike.
09:13 So yes, it can create an avenue for a substantial amount of flows.
09:19 And we have to understand whenever there is a large amount of flows in the bond market,
09:24 it does put a big upward pressure on the currency.
09:28 So the volatility in bond and volatility in currency increases.
09:31 One can argue that it's a good volatility because your prices are appreciating.
09:36 It's not bad volatility.
09:37 But yes, the volatility increases.
09:40 But as I said, that RBI is there to manage the volatility and they have done it exceptionally
09:46 well.
09:47 For example, Indian rupee is one of the least volatile currencies in the world when compared
09:52 against its peers over the past 20 months.
09:55 And these 20 months have been super challenging for all currencies because of the shifting
10:00 global winds.
10:01 So RBI will step in at lower levels if I am talking about the currency.
10:04 As far as the bond is concerned, the bond prices, unlike the Indian rupee, they have
10:08 an oscillation band around the short-term rates.
10:12 So it's not going to just fall like a cliff, fall through the cliff.
10:17 Okay.
10:18 One last question now is that you're going to see an incremental increase from June next
10:23 year for a period of 10 months to that cap that they've pointed out of 10%.
10:29 Would you assume then that once that 10 months is done, assuming that we don't get included
10:34 into any other indices, then the incremental flows will not be substantial?
10:40 Absolutely, because then the incremental flows will depend on how much is the incremental
10:46 increase in the overall AUM of the funds which are tracking.
10:51 So whenever we'll have, let's take a scenario, if now, let's say after 18 months from now,
10:57 I'm saying, the interest rates in America start to fall and the inflation is lower,
11:01 then we'll see a massive gush of money into the emerging market bond indices.
11:06 And in that, India will get substantial incremental flows.
11:10 Fantastic.
11:11 So that kind of answers all of the questions.
11:13 Anindya, thank you so much for joining in.
11:15 Thank you, Bharat.
11:16 A pleasure speaking with you this morning.
11:18 It's my pleasure.
11:19 All right, viewers, there you have it.
11:20 Quite a few of the answers that you might have had about the inclusion of the Indian
11:24 government bond into that emerging market index by J.P. Morgan have probably been answered.
11:29 But in case you have more, do write to us on any one of our social media platforms and
11:33 we will strive to get them answered.
11:36 Do stay tuned.
11:37 This is BQ Prime.
11:37 Thank you.