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Infra sector to gain from India’s inclusion in J.P. Morgan bond index, ET Infra


<p>J.P. Morgan London building</p>
J.P. Morgan London building

NEW DELHI: The announcement by J. P. Morgan on inclusion of Indian government bonds in its benchmark bond index for emerging markets is expected to have a spillover impact on liquidity and financing of the infrastructure sector of India in the long-term.

The inclusion which will take effect from June 28, 2024, is expected to lead to foreign inflows of about $25 billion as per estimates. This will not only increase the demand for Indian government bonds but is also positive for the overall Indian debt market as well as help in bringing down cost of funds. A burgeoning domestic debt market has been an important requirement for funding long gestation infrastructure projects.

“It is really a huge thing for India, not so much as the kind of money which can come in. Let me put it this way, even at its complete implementation of the G-Secs (government securities), in the index portfolio, we are looking at $23 billion to $25 billion (inflows)…,” said N. Ramesh, Deputy Managing Director, EXIM Bank of India.

The inclusion reflects global investors’ confidence in the Indian economy and more specifically the government’s fiscal policy, in which infrastructure spending has been a key focus area. The ongoing National Infrastructure Pipeline comprises projected infrastructure investment of around ₹111 lakh crore to provide high quality infrastructure across the country.

As major economies such as China faces slowdown and Russia faces intense sanctions from western nations, India is the ideal brightspot.

“The inclusion of Indian Government Bonds (IGBs) in JP Morgan’s Emerging Markets Index is a positive development for the Indian debt market, signaling growing global investor interest in Indian securities. As investment options in other countries like Russia and China become scarcer, this move could lead to a more robust bond market in India,” said Rajashree Murkute, Senior Director, CareEdge Ratings.

“The inflows through this passive investment route ($24 billion) are estimated to be deployed for longer gestation. As the eligible bonds should have a maturity profile of at least 2.5 years, this bodes well for the infrastructure sector that attracts patient capital,” said Murkute.

According to a report by investment banking and capital markets firm Jafferies, power and infrastructure companies such as Adani Group, Reliance Industries, Tata Steel, JSW Steel, Hindalco, are expected to see a positive impact from the development.


While stakeholders claim that there is enough liquidity in the banking system to support India’s infrastructure push, past experiences have resulted in asset liability mismatch, with lending from banks limited to shorter durations as against long gestation periods associated with infrastructure projects. That should make the debt market the ideal funding source but currently it lacks liquidity depth, especially the corporate debt market.

Past crises such as those like IL&FS default, has dented investors’ confidence in India’s corporate debt market. The inclusion of Indian government securities in the J. P. Morgan index, could very well support the corporate debt market.

“We already see strong investor appetite for Indian paper to diversify from the struggling China real estate sector. This inclusion in the JPM Index will further bolster foreign investor demand for Indian corporate debt,” said Abhishek Dangra, Analytical Manager at S&P Global Rating.

Dangra highlights that major infrastructure players such as airport developers will continue to rely on a mix of rupee and dollar debt.

“Despite the expansion of investment opportunities and the relaxation of foreign direct investment regulations, construction finance continues to rely primarily on banks and a limited number of financial institutions. While the aforementioned development may lead to increased Indian corporate bond issuances, project financing, especially during the implementation phase, is expected to continue being primarily driven by banks on a sustained basis,” said Murkute.

Notwithstanding the reliance on banks for project financing, a robust corporate debt market is required for funding long gestation infrastructure projects.

N. Ramesh highlighted the inclusion of Indian government bonds into the index will have an impact on the corporate debt issuances in terms of benchmarking.

“There is an international money flowing in, they are going to assess, affirm India’s standing in terms of fiscal responsibility and G-Secs are a reflection of that point. So, their involvement, their participation is expected to bring the yields at a more reasonable level and that benefit may accrue to commercial issuances of bonds, where there can be a better price discovery and affordable pricing for them,” said Ramesh. A better price discovery should bring down the cost of funds.

“If strong demand from foreign investors persists, the spreads between Gilts (government bonds) and corporate bonds may narrow over time,” said Murkute.

The yield on government bonds are lower than those floated by corporates as the latter carries more investment risk with government bonds regarded as among the most secure asset classes. Bond yield reflects the returns that an investor obtains from a bond.


Over the years, major infrastructure players such as GMR and Adani Group have resorted to External Commercial Borrowings or ECBs, as the dollar-denominated bonds provide much stable form of funding and are cheaper. However, as interest rates rise in several developed economies, especially the US, the cost of borrowing on that front is seeing pressure as well.

Ramesh believes that India will experience a thriving domestic bond market, which should address the financing needs of future infrastructure projects.

“Now, there is a thriving market availability in terms of bonds, when the ECB is not there, people are issuing domestic bonds and also there is institutional debt also being provided by banks and financial institutions,” said Ramesh.

“…..regulatory front also the SEBI (Securities and Exchange Board of India) prescription to go in for non-banking funds, non-banking fundraising from the market, that is also kind of pushing a certain class of infra companies, the listed entities to borrow from market, to list their bonds in the market, NCDs (Non-Convertible Debentures), and take money, and there has been a good response for it, we have seen time and again,” said Ramesh.

Others expect that notwithstanding the current high interest rate environment in developed economies, ECBs will remain a preferred route for fundraising.

“We believe that in the next 15 months, more than $1 billion will be invested by us in a pure ECB borrowing to local projects…” said Carlos Santos, Founder and Chief Executive Officer, Ethos Asset Management.

“Despite the fact that rupee will be affected by a boost of US Dollar influx in the country, and attraction of foreign capital to India bond market will positively affect the Indian economy; the demand for infrastructure capital is so huge that it is not possible for local banks alone or for international investors alone to cater to the market and ensure supply for all demand,” said Santos.

Airport operators such as Delhi International Airport Ltd, GMR Hyderabad International Airport Ltd and Mumbai International Airport Ltd, have raised significant funds from dollar-denominated capital markets and that is expected to continue.

“We expect the airports to continue to leverage diversified funding sources with dollar debt, rupee bonds and bank funding – corporate or project,” said Dangra.

While the recent development is a positive step, the liquidity enhancement benefits are likely to materialise gradually over time. Nonetheless, the inclusion of Indian government bonds into the J.P. Morgan index is expected to pave the way for inclusion in other global indexes such as FTSE and Bloomberg, which should make the Indian debt market an attractive option for investors.

  • Published On Nov 24, 2023 at 01:02 AM IST

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