In recent conversations with market participants, JP Morgan’s index managers have said that around 75% of the assets under management (AUM) linked to the bond indices are ‘active’, and that the total AUM tracking the platforms could be more than $300 billion, sources aware of the matter told ET.
“With active funds being 75% of more than the $300 billion-AUM tracking the JP Morgan index, pre-positioning could start from December 2023 to March 2024 itself as long as foreign portfolio investors (FPIs) are registered here. The JP Morgan index managers said that they (FPIs) are mostly registered here,” a source said.
In an active fund, the managers of the fund are free to decide their investment plans within the index as against a passively managed fund that ‘tracks’ an index and hence represents stickier flows. From a broader perspective, domestic fiscal developments or the global view on emerging markets could be factors that lead to churn in actively managed fund allocations.
The JP Morgan index managers expressed optimism about the prevailing settlement process through tax certificates while acknowledging significant improvements in the turnaround time for FPI registrations.
“These were the reasons the FPIs gave positive feedback to the index committee about India’s inclusion this time after years of waiting and watching. This time around, 73% of the investors representing 90% of the AUM agreed for index inclusion as against 50% the last time,” a source said.
Last month, JP Morgan said that India will be included in its GBI-EM Global Index suite starting June 2024 and is expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD) with inclusion of government bonds to be staggered over a 10-month period. The GBI-EM GD accounts for $213 billion of the estimated $236 billion benchmarked to the GBI-EM index family, JP Morgan said.At present, 23 government bonds, which fall under the Reserve Bank of India’s (RBI) fully accessible route (FAR) category are eligible for index inclusion.
“The index managers said that there would be conditions on trading metrics such as the bid-offer spreads of the eligible bonds. If the spreads are too wide or if the bond is lacking in liquidity, it can be excluded by the active fund managers and replaced with a liquid security. The overall weights will be decided based on the outstanding of each security,” a source said.
The sources said that some discussions on tax structures were continuing between investors and the finance ministry, with the former presenting a case for how index inclusion-related flows would lead to lower borrowing costs for the Centre. Some discussions on the use of Belgium-based clearing platform Euroclear were also ongoing although investors are said to have communicated that the absence of the overseas clearing platform would not be a major hurdle.
“When it comes to creating conducive conditions, the central bank has been very helpful and has held regular discussion with the overseas entities regarding any operational procedures,” a source said.