India's J P Morgan bond index entry to suck $11 billion from South Africa, Poland and Thailand

India's imminent inclusion in the world's most widely followed emerging market bond index, J P Morgan's GBI-EM, is expected to draw a combined Rs 91,820 crore ($11 billion) away from South Africa, Poland and Thailand's local markets, the bank's analysts have estimated.

The Wall Street lender said India's entry, which starts on Friday and will take 10 months to complete, was likely to pull Rs 39,232 crore ($4.7 billion) from South Africa, Rs 27,546 crore ($3.3 billion) from Poland and Rs 26,712 crore ($3.2 billion) from Thailand.

It will also pull Rs 24,207 crore ($2.9 billion) and Rs 20,868 crore ($2.5 billion) from the Czech Republic and Chile respectively, it added.

"For EM-dedicated investors, we view India's index inclusion as a zero-sum game and expect outflows from other EM local bond markets to accommodate," J P Morgan's strategists led by Michael Harrison said in a note.

On a broader level, the Europe, Middle East and Africa (EMEA) area is estimated to see the largest regional hit to index weight.

EMEA EM's aggregate weight is expected to drop to 26.2 per cent by March when India's inclusion is complete compared to around 32 per cent at the start of this month and 40 per cent in 2021, before Russia's 2022 exclusion from the index following its invasion of Ukraine.

International investors have bought more than Rs 83,475 crore ($10 billion) of Indian government bonds in the nine months since India's inclusion was announced in September, taking their ownership to a record high.

"Index-related inflows to date... suggest 32-40 per cent of the expected total of Rs 1,66,955 crore - Rs 2,08,706 crore ($20-25 billion) of index-related inflows to India have already played out," Harrison added.

Bond indexes like J P Morgan's are influential because investment funds and other types of money managers use them as performance benchmarks which effectively informs what they tend to buy and sell.

In contrast to South Africa and the others, China, Indonesia and Mexico are not expected to see any reductions in their 10 per cent GBI-EM index weights - the maximum one country can have, and the level India will have reached by March.

Latin America is expected to see a modest decrease, while EM Asia's index weightage is estimated to increase, J P Morgan added.