JPMorgan has declined to include India in a widely followed bond index until at least next year after investors raised concerns about the domestic market’s ability to handle the large volume of capital inflows expected to follow.
India’s rupee-denominated bonds had been on “positive watch” for a year, prompting expectations among some analysts and investors that a decision would be made this month to add the debt to the GBI-EM Global Diversified index with inclusion to follow in 2023.
Inclusion would have allowed a big chunk of India’s $1tn rupee-denominated bond market to join the index at a weighting of up to 10 per cent, opening the door to a potential $20bn to $30bn of inflows.
JPMorgan’s decision not to include the bonds was due to investor concerns over India’s market infrastructure, according to a person familiar with the matter.
Gloria Kim, head of index research at JPMorgan, said India’s market had “made significant strides in easing the access for foreign portfolio investors . . . [We] will continue to engage with the regulators and market participants, and gather feedback on sufficient resolutions for the remaining hurdles.”
The bank opened consultations from the middle of this year with fund managers handling about 85 per cent of the $240bn in assets that follow the benchmark.
Managers “overwhelmingly” voiced concerns about India’s lengthy investor registration process and the ability of its market utilities to handle the volume of trade clearing, settlement and custody that would follow inclusion, the person familiar with the process said. The person added that India was likely to remain on “index watch” — without the positive outlook of its previous status — for a further six to nine months.
A strategist at one western investment bank in Asia said foreign investors were concerned about India’s capacity to handle clearing and settlement, particularly on the matter of trade matching, which ensures that buy and sell orders from both parties in a transaction line up.
Important parts of this process are still handled manually in India, such as matching the time stamp down to the minute and the size of a trade to two decimal places, with any discrepancies resulting in the automatic cancellation of a transaction.
Another major challenge has been where and how bond trading should be settled — whether outside India’s borders on a platform such as Euroclear, that is familiar to global financial institutions, or in India, where investors would have to complete onerous registration procedures.
An exemption to capital gains tax for foreign investors, which would have paved the way for easier settlement at Euroclear, had been anticipated by analysts ahead of this year’s fiscal announcements in February but failed to materialise.
“With operational issues, it’s always a work in progress,” the strategist said. “It’s an emerging market . . . you’re not trading US Treasuries.”
A decision to add Indian debt to one of JPMorgan’s flagship indices would mark an inflection point for global investor exposure to the world’s fifth-largest economy and the fruition of years of discussions between India’s government, index providers and investors.
Indian authorities have long been wary of opening the country’s financial markets to foreign hot-money flows, which can quickly change direction. The government’s ability to borrow on local markets in local currency, rather than running the risks of borrowing from foreign investors in foreign currency, has been a valued bulwark against volatility on global markets.
But analysts say the government has been persuaded that money benchmarked against indices is likely to be more “sticky”.
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