Mumbai: With India’s recent inclusion in the JP Morgan emerging market bond index, there is growing anticipation of active fund managers making their presence felt. This impact could potentially be observed as early as December, when global investors make fresh allocations for the upcoming year.
Sources familiar with the matter have revealed that JP Morgan’s index managers have indicated that approximately 75% of the assets under management (AUM) linked to the bond indices are actively managed. The total AUM associated with these platforms could exceed $300 billion.
One source mentioned that active funds, comprising 75% of the over $300 billion AUM tracking the JP Morgan index, may start pre-positioning between December 2023 and March 2024, provided that foreign portfolio investors (FPIs) are registered in India. The JP Morgan index managers believe that most FPIs are already registered here.
In an active fund, fund managers have the flexibility to determine their investment strategies within the index, in contrast to passively managed funds that simply ‘track’ an index, resulting in more stable flows. On a broader scale, domestic fiscal developments or global perspectives on emerging markets may influence the allocation of actively managed funds.
The JP Morgan index managers expressed confidence in the current settlement process involving tax certificates, acknowledging significant improvements in the turnaround time for FPI registrations.
According to another source, these factors contributed to positive feedback from FPIs regarding India’s inclusion in the index after years of anticipation. This time around, 73% of investors representing 90% of AUM agreed to index inclusion, compared to 50% in the previous instance.
JP Morgan recently announced that India will be incorporated into its GBI-EM Global Index suite, starting in June 2024. India is expected to reach a maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD) as government bonds are gradually included over a 10-month period. The GBI-EM GD comprises $213 billion of the estimated $236 billion benchmarked to the GBI-EM index family, according to JP Morgan.
Currently, 23 government bonds, categorized under the Reserve Bank of India’s (RBI) fully accessible route (FAR), are eligible for index inclusion.
The source added that discussions on tax structures were ongoing between investors and the finance ministry. Investors have presented a case highlighting how flows related to index inclusion could lead to lower borrowing costs for the government. Additionally, discussions regarding the use of the Belgium-based clearing platform Euroclear were underway, with investors indicating that the absence of this overseas clearing platform would not be a major obstacle.
“When it comes to creating favorable conditions, the central bank has been very helpful and has held regular discussions with overseas entities regarding operational procedures,” noted the source.