India's inclusion in JPMorgan index 'likely the biggest' index-related event of 2024

India's inclusion in JPMorgan index is likely to be the biggest index-related event of 2024, according to Lee Collins, head of Index Fixed Income at Legal & General Investment Management (LGIM).

India will join the JPMorgan GBI-EM Global Diversified Index at the start of Q3 this year.

He said: “India’s inclusion in major fixed income indices has been a topic of discussion for a number of years and it is exciting to see this begin at the end of June, with JPMorgan being the first mover, including it in its GBI-EM Global Diversified Index. We would expect that, for our index fixed income desk, India’s inclusion in the JPMorgan index will be the biggest individual index-related event in 2024. We’ve been investing in the Indian Government bond market for over two and a half years, since the launch of our India Bond ETF, and thus we are fortunate to have the practical experience that many of our peers will not have as of today.

“With respect to the implementation of the index change, this will vary depending on the nature of the investment approach. There will be some, more speculative investors who will have been seeking to add alpha around the index event since announcement and may even be pre-positioning in advance of this.

“Index or passive investor approaches will depend on the ability to deviate from the index within their respective investment guidelines. More pragmatic index investors may have already started to take small steps of adding exposure and will add to this over the course of June, whereas the strict passive investors will be waiting until the end of June when inclusion officially begins.

"As this is a new market for many foreign investors, if they haven’t happened already, there will be a lot of what I’d describe as live ‘test’ trades being executed. These test trades are very small in size and have the intention to test that, in practice, all the operational and trading set-ups are working correctly. This gives more confidence that when the trading starts in earnest, there will be a lower chance of an issue.

He continued: “There will also be some investors who may still be opening accounts and completing the onboarding processes to be able to trade Indian Government bonds. Some of these probably won’t be ready in time for the end of June and so they will be preparing alternative options to ensure they can gain exposure.

"Two of the common alternatives are to buy INR denominated supranational bonds or to invest in an India bond ETF, such as LGIM’s. INR supras have seen an increase in issuance since the JPMorgan inclusion announcement and these are bonds which do not require domestic accounts, settle in USD and also are not subject to withholding or capital gains taxes.

"The benefit of ETFs is that they offer a cost efficient and simple method to gain exposure to Indian Government bonds and, depending on investors’ tax status, may offer tax efficiencies versus buying bonds directly.”