Marginal credit boost: Fitch on India's inclusion in JP Morgan's bond index

Fitch estimated that inclusion in the GBI-EM indexes could facilitate approximately $24 billion in passive inflows into government bonds between June 2024 and March 2025

The recent inclusion of Indian sovereign bonds in a key emerging market bond index managed by JP Morgan has been deemed to have “marginal” positive effects on India’s credit profile in the near term, according to Fitch Ratings.

The rating agency said this move could support a diversification of the investor base for Indian government securities. “This could serve to lower funding costs slightly and support further development of domestic capital markets, but direct positive effects on India’s credit profile will be marginal in the near term,” it said.

Fitch highlighted that India’s high government debt and interest payments-to-revenue ratios are weaknesses in its credit profile. Developments that help lower funding costs can significantly influence the sovereign’s creditworthiness. “However, we expect the positive effect on the sovereign rating of India’s inclusion in the JP Morgan Global Bond Index-Emerging Markets (GBI-EM) to be small, especially in the near term, as its impact on fiscal credit metrics is unlikely to be significant,” it said.

The vulnerability of India’s sovereign financing costs to external drivers is currently limited, reflecting the dominant role of domestic financing. However, this could increase over time if non-resident holdings of government securities were to rise significantly and fiscal metrics remain weak, the rating agency noted. 
 

Fitch also suggested that increased exposure to foreign investor sentiment around government securities could encourage authorities to pursue policies consistent with macroeconomic stability and fiscal prudence, benefiting the sovereign’s credit profile over the longer term. However, it also warned that there are examples of governments whose bonds are included in benchmark indexes that have pursued economic policies with adverse effects on foreign investor confidence. “We do not believe that inclusion in the JP Morgan GBI-EM index will significantly affect India’s fiscal policy approach,” it said.

The inclusion in JP Morgan GBI-EM index could facilitate about $24 billion in passive inflows into government bonds between June 2024 and March 2025, the rating agency said, adding that “flows could be greater if other indexes also move to include Indian government securities”.

The rating agency further noted that an increase in foreign investment in India’s government securities markets is likely to have other positive effects, albeit small in scale. “A more diverse investor base could reduce crowding-out risks: If the government becomes less reliant on financing from domestic financial institutions, it could give them greater leeway to provide credit to the private sector. It could also stimulate further capital-market development,” it added.