Ahead of India’s June 28 inclusion in the GBI-EM Global Index Suite, how have operational metrics evolved in the country’s bond markets? Are global clients prepared for the process?
Gloria Kim: Based on the annual Index Governance Consultation process, market feedback so far has been largely positive. Majority of our clients already have their accounts set-up to trade in the IGB market. Moreover, we see positive market momentum as there are now several India-focused Bond ETFs and UCITs funds offering intra-day liquidity. As always, there are still teething issues when entering a new market, however we have found these to be related to mostly operational readiness and flexibility of counterparties and custodians rather than barriers to entry.
What were the key considerations that prompted JP Morgan to make the decision after years of talks with Indian authorities?
Gloria Kim: The introduction of the Fully Accessible Route (FAR) bonds by the RBI in 2020 made it possible for the FPIs to invest in Indian government bonds (IGBs) with less constraints, paving the way to review India’s inclusion into the GBI-EM Global Diversified index. GBI-EM Global Diversified index is the mostly widely used benchmark within the GBI-EM family, following the index pillars of Accessibility, Liquidity, Replicability and Transparency and appealing to an international investor base. As it was announced after 3 years of being on the Index Watch for index eligibility review, India is on track for inclusion in terms of scope and timeline. India-FAR bonds are eligible for the GBI-EM indices following a 10-month phased inclusion period starting June 28, 2024.
The Indian government authorities have brought in substantial market reforms and developments including extending the trade-matching window for FPIs, margin-funding facility by custodians and streamlining of the FPI on-boarding process through introduction of a single Common Application Form (CAF). The registration process has also been simplified as digital signatures & scanned copies are now accepted for account registration. These steps have improved the overall market accessibility and tradability for the FPIs, making investors more comfortable with investing in the IGB market.
In September, JP Morgan had said that the GBI-EM GD accounts for US $213 billion of the estimated US$236 billion benchmarked to the GBI-EM family. Could you provide us with a broad idea of the current numbers for funds tracking the GBI-EM DD index relative to the GBI-EM family of indices?
Gloria Kim: Yes, GBI-EM GD accounts for approximately US$213 billion of the estimated US$236 billion benchmarked to the GBI-EM family (based on the JPM EM client survey). Additionally, there are two ETFs with a combined AUM more than US$700 million, benchmarked against the J.P. Morgan India-FAR index.
JP Morgan had said that effective January 31, 2024, enhanced liquidity screening would be applied to bonds issued in global format from index eligible markets. Could you give us an idea of what this process entails?
Gloria Kim: GBI-EM index includes both local currency and dual-currency (global) bonds. However, in recent past, we have observed that primary issuance in global bonds have become less frequent. Also, investors have highlighted the drop in secondary market liquidity of these bonds, making it difficult for investors to replicate the index position. Based on these factors, we have enhanced our liquidity screening criteria for global bonds under which only global bonds from countries with primary market activity (i.e., new issuance and/or taps in global bond format) in the trailing 24-month period (evaluated at each month-end rebalance) will remain Index eligible.In September JP Morgan had said that 73% of benchmarked investors had voted in favour of India’s inclusion in the index. Could you give us a broad sense of the geographies that this investor community comes from?
Gloria Kim: GBI-EM Benchmarked investors are spread across all regions – Asian investors make up around 20% of our base with the rest split equally between Europe and the Americas. Comparatively speaking, India has one of largest debt markets in the Emerging Market landscape and investors have been interested in the IGB market because of the liquidity and attractive yields that it offers.