(Bloomberg) -- JPMorgan Chase & Co. will add Indian government bonds to its benchmark emerging-market index, a keenly awaited event that could drive billions of foreign inflows to the nation’s debt market. 

The decision is the latest sign of India’s growing appeal to international investors as the country’s economic growth outstrips peers, its geopolitical influence grows and companies including Apple Inc. look for alternatives to China. While foreigners play a small role in the Indian bond market, inflows have been picking up in recent years and the country’s assets have proven resilient to financial turbulence that has roiled other developing-nations.

The index provider will add Indian securities to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024. The South Asian nation will have a maximum weight of 10% on the index, according to a statement Thursday. 

The move follows the Indian government’s introduction of bonds that can be fully owned by foreigners in 2020, as well as steps to aid foreign portfolio investments, the team led by the firm’s global head of index research, Gloria Kim, said in a statement. Almost three-quarters of benchmark investors surveyed were in favor of India’s addition to the index, they said. 

“Foreign investors will have access to a large, idiosyncratic factors driven market, while domestic investors will welcome investors with varying risk-return preferences,” said Nagaraj Kulkarni, co-head of Asia rates ex-China at Standard Chartered Plc in Singapore. He expects the decision to drive inflows of as much as $25 billion by March 2025.

Indian bonds reversed gains on likely profit booking, with the yield 10-year bond rising two basis points to close at 7.19% after dropping as much as eight basis points. The rupee rose 0.2% to 82.9375 per dollar. Benchmark yields may slide to 6.8% in the coming months, according to Citigroup Inc.

India’s milestone is a stark contrast to many emerging-market peers, not least neighboring China, whose economic woes and struggling financial markets have become a source of frustration for global investors. In fact, those troubles have only burnished India’s appeal.

Foreign investors have bought $3.5 billion worth of Indian debt this year, according to data compiled by Bloomberg. India’s inclusion reflects the “confidence that financial markets have on the long-term prospects of the Indian economy and our financial and macro policies,” said Chief Economic Adviser V. Anantha Nageswaran.

On the equities side, India has been one of the top investment destinations among major emerging markets this year, with its fast-growing economy and solid corporate earnings pushing the nation’s equity benchmark near an all-time high. Developing-market money managers are most overweight on India in their Asia portfolios, Goldman Sachs Group Inc. analysts wrote in a report earlier this month.

Banks Advance

JPM’s decision spurred gains in the shares of Indian banks, shadow lenders and debt-services providers — companies that stand to benefit from gains in the bond market and the expected drop in their cost of capital. PNB Gilts Ltd., a bond underwriter, surged 20%, the most in more than a decade. 

While concerns over rising oil prices and higher-for-longer US interest rates have spurred outflows from local shares in September, overseas investors have bought almost $16 billion on a net basis this year. That’s set to be the biggest annual inflow since 2020.  

“With inflation coming under control, the inclusion will open more gates for foreign capital to flow into India,” said Charu Chanana, a strategist at Saxo Markets in Singapore. 

Expectations that India may be added to international gauges had been rising in recent months as providers look to diversify index constituents. Russia’s invasion of Ukraine had seen it drop off indexes, while China’s worsening economic woes have taken the shine off the country’s sovereign debt.

That left India as the world’s last big emerging market that hasn’t joined others like China on the global debt indexes. Assets worth $236 billion track the JPMorgan emerging market bond indexes, the company said.

Still, authorities in India have been largely uncompromising in making changes to tax policies that would make it easier for the securities to be added to global indexes. Korea, another large emerging market, signed an agreement to open an omnibus account with Euroclear Bank SA, helping foreigners’ access.

Currently, 23 bonds worth a combined notional $330 billion are eligible to be added into the index, JPMorgan said. Inclusion will be staggered over 10 months at roughly 1% weight per month, it said.

Foreigners have raised their holdings of index-eligible bonds to almost $12 billion, from $7.4 billion at end of 2022, in anticipation of the inclusion, according to Clearing Corp. of India data.

INDIA REACT: Bond Index Inclusion to Boost Inflows, Lift Rupee

FTSE Russell, another major index provider, has the nation’s bonds on index watch for inclusion in its emerging market gauge.  

Elsewhere, Egypt has been placed on negative watch due to the material currency repatriation hurdles reported by investors, JPMorgan said. The country’s index eligibility will be assessed over the next three to six months, it said.

Bloomberg LP is the parent company of Bloomberg Index Services Ltd, which administers indexes that compete with those from other service providers.

--With assistance from Maria Elena Vizcaino, Shikhar Balwani, Abhishek Vishnoi and Chiranjivi Chakraborty.

(Updates with bonds and rupee closing levels in the sixth paragraph. A previous version corrected the reference to the FTSE decision.)

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