Indian government bonds will be included in the JP Morgan GBI EM Index from June 2024 onwards. Economists at Société Générale note that the announcement is positive for the currency and bond yields.

Another positive catalyst for assets

The recent announcement to include Indian Government bonds into JPM GBI EM Global Diversified Index is bullish for INR rates and significantly limits downside risks in the currency. 

Given the current market conditions (higher Oil prices and US yields), the bullish outcomes from the inclusion could be realised later into 2024 – closer to the actual inclusion (June 2024). 

We lower our 2Q24 and 3Q24 forecasts for 10y bond yields by 20 bps and 30 bps respectively and maintain our current view on the INR.

A potential rally in the currency could be counteracted by RBI’s accumulation of reserves. However, the currency should continue to outperform on a total returns basis.