India’s bond index inclusion: Attracting foreign investment; bolstering its regional position

10 October 2023

Murray Collis, Chief Investment Officer, Fixed Income (Asia Ex-Japan)

On 21 September 2023, JPMorgan announced that Indian government bonds would be included in the company’s Government Bond Index-Emerging Markets (GBI-EM) Global index suite starting in June 2024. In this investment note, Murray Collis, Chief Investment Officer, Fixed Income (Asia Ex-Japan), examines the short- and long-term implications of this significant decision for the Indian bond market, including how it could attract greater foreign investment and may bolster the country’s long-term position in Asia’s fixed-income universe.

After several years of reform, it has now been confirmed that India will be included in the JPMorgan GBI-EM Global index suite starting in June 2024, representing a significant milestone in the development of the Indian bond market.

This comes after India was placed on ‘watch positive’ for index inclusion in 2021 after the Indian government announced the removal of restrictions for foreign investors in the sovereign bond market in 2020. JPMorgan’s recent decision also considered investors’ opinions that India’s inclusion would result in a more diverse and representative index by reducing concentration among greater-weighted countries.

As a result, starting in June 2024, India will join the flagship JPMorgan GBI-EM Global Diversified index with a 1% weight. At this point, only FAR (Fully Accessible Route)- designated Indian government bonds with a notional value of US$1 billion or more and at least a remaining maturity of 2.5 years will be allowed to join the index¹. Currently, 23 bonds with a notional bond value of US$330 billion are eligible for the index.

Over time, the country’s weight will increase by one percentage point each month until it reaches its final index weighting of 10% in April 2025, on par with China and Indonesia, the largest expected country weights of the revised index.

After full inclusion, India will be the second biggest EM country in the index after China. Asia will compose roughly 50 percent of the index. Overall, inclusion gives investors access to the second-largest bond market and the highest-yielding market in the region.

Short-term implications: increased capital inflows and macro support

Over the short term, inclusion is expected to increase passive capital flows linked to the index significantly.

Roughly US$236 billion of global funds is benchmarked to the GBI-EM Global index suite. Once inclusion starts, inflows into the country’s government bonds are expected to total around US$30 billion, or US$3 billion per month, until India reaches its final weight². Related buying should be most supportive for the long end of the curve with maturities greater than five years.

From a macro perspective, increased capital inflows should help narrow the country’s marginal current account deficit (-0.2% of GDP- Q1 2023) or even flip it into surplus, which should support the rupee.

The initial response from the market to the index inclusion news has been positive: Indian bonds have outperformed other Asian local markets month to date by around 10-15 basis points³.

Long-term implications: greater foreign investment and structural market maturation

Over the longer term, the implications should be more transformative, including greater foreign investor participation while the government bond market and the Indian bond asset class continues to develop and mature structurally.

Around 1.9% of the country’s government bond market is currently owned by foreign investors (Chart 1), significantly below other emerging markets, particularly when accounting for India’s economic size as the world’s fifth-largest economy.

Chart 1: Foreign ownership of government bonds in key emerging markets (%)⁴

JPMorgan’s decision may also spur further foreign investment through knock-on effects and the inclusion of Indian government bonds in other major global sovereign bond indices:

The Bloomberg Barclays Emerging Market bond index may review India’s inclusion as early as this year, as some investors have pushed for an expedited review before 2024. Inclusion could result in an estimated US$15-$20 billion in inflows⁵.
FTSE Russell’s Emerging Market debt index has had India on its “watch list” since March 2021. It is slated to review India’s status in September 2023 for potential inclusion.

The impact of greater foreign investment could lead to numerous structural changes in the government bond market, such as an increase in the number of potential buyers, a potential improvement in overall market liquidity, and a central government that may be more fiscally prudent due to greater external scrutiny.

Ultimately, the potential benefit for foreign investors is that index inclusion will garner more attention and raise the profile of the high-yielding bond market of the world’s fifth-largest economy.

The inclusion also does not come without long-term risks, as India remains an emerging market. Most prominently, substantial inflows into the government bond market may lead the Reserve Bank of India or the government to smooth out its market impact via intervention. Furthermore, it could result in the government increasing net market borrowing and will likely subject the local bond market to greater exposure to changes in global financial conditions.

Investors should remain vigilant and seek out fund managers with experience in the burgeoning but volatile Indian bond market.

Manulife Investment Management capabilities in Indian fixed income

Manulife Investment Management has been investing in onshore Indian bonds in its flagship pan-Asian fixed income strategy since 2016.

In 2020, Manulife Investment Management also created a joint venture (JV) with Mahindra Finance in India⁶. As one of the few global financial institutions with a presence in India, the JV gives us a distinctive onshore presence with an experienced team of fixed income portfolio managers, analysts, and traders to leverage local market insights and analysis into informed investment decisions.

Having on-the-ground expertise and extensive experience investing in India gives us an edge navigating access to the onshore market on behalf of foreign investors as structural barriers around administrative and settlement-related issues remain for now.

Conclusion

We believe JPMorgan’s index inclusion decision is a welcome first step for India’s fixed income market to attract greater international attention and foreign investment. Indeed, not only should it help bolster India’s already robust macro credentials over the short-term, but also assist the government bond market’s development over the long-term.

With the inclusion of Indian government bonds in other major global bond indices over time, the market should gradually become a key one to watch in Asia’s fixed income universe.

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1 JPMorgan report issued on 21 September 2023.

2 JPMorgan report issued on 21 September 2023.

3 Bloomberg, as of 28 September 2023.

4 Morgan Stanley report, as of 22 September 2023.

5 Bloomberg, 22 September 2023.

6 On 29 April 2020, Mahindra & Mahindra Financial Services Limited (Mahindra Finance) completed the proceedings for divestment of 49 percent stake in its wholly-owned subsidiary, Mahindra Asset Management Company Private Limited (Mahindra AMC), to Manulife, a leading global financial services group. Manulife has invested US$ 35 million (~INR 265 crore) in the 51:49 joint venture, which aims to expand its fund offerings, drive fund penetration, and achieve long term wealth creation in India. https://www.manulife.com/en/news/manulife-investment-management-acquires-49-percent-in-mahindra-asset-management.html.

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Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
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The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.

General Risk Disclosure

Funds offered on this platform may invest in equity, fixed income securities, exchange-traded funds, collective investment schemes and/or other instruments, including derivatives, and each of which has its specific investment objective/ policy with its specific features and different risk profile.
Distribution of dividends, the frequency of distribution and the amount/rate of dividends are not guaranteed. Dividend of certain share/unit classes, at the fund or the investment manager’s discretion, may be paid out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share/unit of the respective share/unit classes after the distribution date.
Some funds may invest in bonds or debt securities which may be subject to credit, liquidity, counterparty and market risks.
Some funds may invest in non-investment grade bonds and unrated securities which may be subject to greater credit and liquidity risks, and may be more volatile than higher rated securities. Some funds may invest in investment grade debt securities, which may be subject to ratings downgrades by the rating agencies that may affect the net asset value of the fund.
Some funds may invest in derivative instruments which may involve additional risks. (For example, leverage may cause greater volatility.)
Some funds may make extensive use of derivatives including more complex derivative instruments or strategies to achieve the investment objective, this may give rise to additional exposure in that performance may rise or fall more than it would have done otherwise. In adverse situations, the fund’s use of derivative instruments may become ineffective and the fund may suffer significant losses. The use of derivatives may give rise to leverage, liquidity, counterparty and valuation risks.
Some funds may invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Some funds may invest in securities of small and/or medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Some funds may invest in a single country/region and/or a particular industry sector which may be concentrated and subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Some funds may invest directly in certain China A shares via the Stock Connect, which may involve risks related to investments via the Stock Connect and Mainland China investment.
Some funds may have significant exposure to Renminbi ("RMB") bonds/equity/assets or emerging markets, which will be subject to debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with more established markets.
Some funds with significant exposure to RMB bonds/equity/assets may hold a significant portion of assets in deposits if there are not sufficient RMB instruments to invest in. This may adversely affect the funds’ return and performance.
Some funds using Qualified Foreign Institutional Investor (“QFII”) quota to invest directly in debt instruments/shares in Mainland China may be subject to various requirements and restrictions under the laws of Mainland China related to QFII investment and custodial risks.
Some funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
As RMB is not freely convertible, currency conversion is subject to exchange controls and restrictions. There can be no assurance that RMB will not be subject to devaluation. Insufficient amount of RMB for currency conversion or devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated class(es) of certain funds. The “Dim Sum” bond market is still a relatively small market which is more susceptible to volatility and illiquidity. Due to RMB concentration risk, the value of the funds with substantial RMB exposure may be more volatile than that of a fund having a more diverse portfolio of investments.
Some funds’ performance will be closely tied to the economic, political, regulatory, geopolitical, market, currency or other conditions in the European Economic Area and may be subject to increased liquidity, price, and foreign exchange risk.
Some funds may invest in Russia and some investments in Russian securities may be unlisted securities not dealt on a regulated market. The Russian market presents specific risks in relation to the settlement and safekeeping of securities.
Investment involves risk. Investors may expose to capital loss and should not invest solely based on the information on this website alone and should read the offering documents for details including the associated risk factors, charges and features of the funds and their share/unit classes. Past performance information is not indicative of future performance.

Manulife Global Fund

Manulife Global Fund is an umbrella fund comprising a number of sub-funds investing in equity and/or fixed income securities, each of which has a different investment objective and risk profile and may involve equity market, geographical concentration, sovereign debt, liquidity, volatility, credit downgrade, interest rate, counterparty risks. Certain investors may also be subject to the risk relating to RMB hedged share class.
The relevant distributing class of the sub-funds does not guarantee distribution of dividends, the frequency of distribution and the amount/rate of dividends. Dividends may be paid out of income, realized capital gains and/or out of capital of certain sub-funds in respect of Inc share class(es). Dividends may be paid out of realized capital gains, capital and/or gross income while charging all or part of their fees and expenses to capital (i.e. payment of fees and expenses out of capital) in respect of MDIST (G) and R MDIST (G) share class(es). Dividends paid out of capital of these sub-funds amounts to a return or withdrawal of part of the amount of an investor’s original investment or from any capital gains attributable to that original investment and may result in an immediate decrease in the net asset value per share in respect of such class(es) of the sub-funds.
Certain sub-funds invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
Investment involves risk. The sub-funds may expose their investors to capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds and their share classes.
Each sub-fund intends to use financial derivative instruments (“FDIs”) for investment, efficient portfolio management and/or hedging purposes. The use of FDIs exposes the Fund to additional risks, including counterparty/credit risk, liquidity risk, valuation risk, volatility risk and over-the-counter transaction risk.
Given RMB is currently not a freely convertible currency, payment of redemptions and/or dividend payment in RMB may be delayed due to the exchange controls and restrictions applicable to RMB. As offshore RMB (CNH) will be used for the valuation of RMB denominated Class(es), CNH rate may be at a premium or discount to the exchange rate for onshore RMB (CNY) and there may be significant bid and offer spreads and thus the value of the RMB denominated Class(es) will be subject to fluctuation. Any devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated Class(es) of certain sub-funds.

Manulife Advanced Fund SPC

Manulife Advanced Fund SPC is an umbrella fund comprising a number of sub-funds investing primarily in equity and bond securities, each of which has a different investment objective and risk level.
The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
Investment involves risk. The sub-funds may expose to a high risk of capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds.

Manulife Hong Kong Series

Manulife Hong Kong Series (“the Series”) is an open-ended unit trust comprising a number of funds primarily investing in equities, debt securities, exchange-traded funds and/or collective investment schemes, each of which has a different investment objective and risk level.
The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.