Global financial firm J P Morgan has said that it plans to include Indian government bonds (IGBs) or government securities (G-Secs) into its benchmark Emerging Market index from next year, a move that will bring down borrowing cost for the government.

The inclusion of the IGBs will be staggered over a 10-month period from June 28, 2024 to March 31, 2025, indicating one per cent increment on its index weight.

"India's weight is expected to reach the maximum weight threshold of 10 per cent in the GBI-EM Global Diversified, and approximately 8.7 per cent in the GBI-EM Global index," J P Morgan said in a statement on Friday.

This would help attract higher foreign flows, as many overseas funds are mandated to track global indices.

It will also help bring in large passive investments from overseas, as a result of which more domestic capital would be available for industry, as crowding out would be reduced.

Commenting on the issue, Economic Affairs Secretary Ajay Seth said, "it is a welcome development showing confidence in the Indian Economy." Chief Economic Advisor V Anantha Nageswaran said "we welcome this development. JP Morgan has made this decision on their own. It attests to the confidence that financial market participants and financial markets, in general, have on India's potential and growth prospects and its macroeconomic and fiscal policies.

Just as long-term equity investors have been amply rewarded by investing in Indian markets, so will long-term investors in Indian government bonds be, Nageswaran added.

In her Budget speech for 2020-21, Finance Minister Nirmala Sitharaman had said, "Certain specified categories of government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well." The specified securities, which will be listed on the indices, will not have a lock-in requirement.

This was long pending and there were certain issues including with regard to taxation, which the government has ironed out in the last many months.

Some of the experts openly expressed views that the gains from inclusion of IGBs to global indices are greater than the risks.

According to Axis Mutual Fund, passive trackers of the above indices hover at around USD 250 billion and the staggered approach implies an inflow of USD 1.5 – 2 billion per month in the 23 identified bonds.

"This flow is likely to boost India's profile on the world stage and further strengthen local fundamentals. We believe the RBI could conduct sterilization operations during this inclusion period buffeting Forex reserves and the currency," it said.

"This JP Morgan index is USD 240 billion and India will be 10 per cent of it, which means USD 24 billion. This will reset the base rate for India and the yield should come down sharply. India's cost of borrowing will come down," said AUM Capital National Head-Wealth Mukesh Kochar.

Since Covid, the fiscal deficit in India has remained elevated due to higher borrowing, Kochar said, adding this event will ease borrowing pressure as a large part of the borrowing will be observed by this route and banks' Treasury will be flushed with mark-to-market gains.

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