JAMIE Dimon, the charismatic CEO of JP Morgan was in India last week for their annual investor conference. It was his first visit to the country post the pandemic and spoke at length to CNBC TV 18’s Shreen Bhan. And, boy, he was effusive! “Prime Minister Modi has been doing a very good job. Things like Aadhaar, to get a bank account for several thousand people, simplifying taxes, trying to open up more for foreign direct investment to the National Infrastructure Program. The universe is here, (and) we’re not the only bank here, there are large other banks with a lot of people, but so is Accenture, McKinsey and obviously you have your local Tata, etc., so those things are driving optimism. And it’s not just because of the complications with China, I think that’s an opportunity but some of this optimism would have been there anyway. It creates a huge opportunity in India for services and manufacturing sectors.” Filippo Gori, JPMorgan’s CEO for Asia Pacific who was also in India for the same conference, told Reuters,”People are starting to get excited about the whole China plus one element and while other countries have benefitted, India could be the largest beneficiary.”
Just look at the number, seven to eight years back when they began the annual jamboree, they had about 70 companies participating in the event, now it has gone up to over 700 with 100 companies making their presentations. They have over 60,000 employees and a spanking new office complex with over 10,000 staff in Navi Mumbai was formally inaugurated by Dimon during the trip. Another facility has simultaneously commenced operations in Bengaluru. As the company said,’’ There are two of the firm’s largest technology and operations centres globally that will drive long-term service excellence, efficiency, and innovation.’’ While all this is an exciting part of the India growth story, the real hurrahs came when the company announced that India will be included in the JPM GBI-EM Global Diversified Index beginning 28 June 2024. It will be ramped up at one per cent a month till March 31, 2025. Launched in June 2005 as the first comprehensive global (local) emerging markets index, GBI-EM tracks local currency bonds issued by emerging market governments. It has $213 billion worth of assets under management (AUM).
The company said India had been on their shortlist since 2020 and the decision was facilitated by the Government’s introduction of the fully accessible route (FAR) programme in 2020 and the transformative market reforms for aiding foreign portfolio investment. In layman’s terms, FAR is the initiative crafted by the Reserve Bank of India (RBI) to enable non-residents to invest in specified government bonds. Under FAR, eligible investors can invest in specified Government securities without being subject to any investment ceilings. The country’s bond market(worth more than $2 trillion) will see specific bonds being included in the JPM GBI-EM Global Diversified Index.
When overseas investors acquire Indian bonds included in the index, they can exchange their foreign currency like dollars for rupees. The demand for the rupee then will naturally increase its value, making it stronger against other currencies. And there will be a huge inflow of foreign exchange estimated at anywhere between $ 25 billion to 40 billion, depending on who you are talking to. But $ 25 billion is the very least expected to inflow.
Source of funds
Apart from elevating the India story, how does it help the country? Look at it this way: the country’s fiscal deficit is pretty high at close to 5.9 per cent of the GDP for March 31, 2024. What this means is that the Government will borrow a record Rs 15 trillion (around $ b180 billion). As things stand at present, it is the banks, mutual funds and insurance companies that have bought the Government debt issued as bonds. With India getting on the index, there will be one more source of funds that will help bring down bond yields and reduce the Government’s cost of borrowing. Naturally, this can embolden the Government to look at supporting higher debt over longer periods which will give a huge fillip to scores of infra and allied projects in the pipeline.
A positive offshoot will be the scrutiny of the country’s fiscal matrix. It will naturally positively impact the way the Government spends money as well as the efficiency of both tax collection and spending across the board. In effect far greater transparency can help the country get on the other funds on the horizon– Bloomberg Global Aggregate Index and the FTSE Russell World Government Bond Index.