EM Index Inclusions and Exclusions: India Thrives, Egypt Faces Challenges

EM: Good news for India, bad news for Egypt

The financial institutional (FI) community take a keen interest in the make-up of key benchmark indices, and the big news overnight is that Indian local currency government bonds will be included in the JPMorgan GBI-EM index from June next year. Some estimates put inflows into these bonds as much as $25bn as passive tracker funds make their adjustment. We know as well that some in the FI community like the Indian rupee (INR) carry trade, where the three-month implied yield through the non-deliverable forward market is 7%+ annualised. The view here as well is that the Reserve Bank of India is an active intervener and will be seeking to cap USD/INR in the 83.00/83.30 area. Expect this JPMorgan index announcement to spark more interest in the rupee.

At the same time, JPMorgan put Egypt on negative watch for possible removal from the GBI-EM index, because investors were struggling to repatriate FX proceeds after selling out of Egyptian government bonds. This negative watch is expected to be resolved – for worse or better – over the next three months. Expect pressure to remain on the Egyptian pound for another devaluation, with the risk of EGP implied yields spiking back to the 50%+ area.