Ahead of the much-awaited inclusion of government securities into JPMorgan Chase & Co’s emerging market index from Friday, foreign investors have already poured in nearly $8 billion in the bond market in the first half of 2024. The inflows are significantly higher compared to last year, but this is just the beginning as experts expect the domestic bond market to attract nearly $30 billion inflows over the next 10 months. The net investments by foreign portfolio investors (FPIs) in domestic debt market was just $2.1 billion in the first half of 2023.
“Given the inflows of $11.2 billion since the announcement, we could see another $30 billion spread over the next 10 months, or around $3 billion per month on an average,” analysts, including Danny Suwanapruti at Goldman Sachs, said in a note.
JP Morgan Chase & Co announced in September last year that it would add Indian government bonds to its benchmark Global Bond Index Emerging Markets Index (GBI-EM). The inclusion will occur over a period of 10 months starting Friday through March 31, 2025. India will have a 1% weight in the index, which will gradually rise to 10% over a 10-month period.
Since this announcement, FPI have invested nearly $12.9 billion in the domestic bonds, which is much higher than $8.4 billion in 2023.
The inclusion of government bonds has the potential to lure $20-25 billion of global flows into Indian debt, according to Gloria Kim, head of index research at JPMorgan.
Rising foreign inflows due to the inclusion of government securities in global indices, fiscal consolidation and cooling of US treasury yields have moved bond yields down in the past six months and experts expect further easing in the coming months.
“The yield on 10-year G-sec may ease to 6.80-6.85% over the next three months. The market has already factored in the impact of bond inclusion and yields will be mainly driven by RBI’s monetary policy and inflation trajectory,” Vikas Goel, managing director and CEO at PNB Gilts, told FE.
Bond inclusion will also double the foreign ownership of government bonds. Foreign holdings of India’s debt are around 2.4% of the total outstanding debt and JPMorgan expects the level to reach 4.4% over the next year. Securities included in global bond indices do not have any foreign investment limits.
“We expect long bond yields to continue to drift lower over the next couple of quarters. We expect the benchmark 10-year bond yield to go towards 6.50% by Q4FY25,” said Puneet Pal, head-Fixed Income, PGIM India Mutual Fund.
In recent months, foreigners have started buying longer tenor government bonds in the hope of better returns once the RBI starts cutting rates later this year. India will be the 25th market to enter the GBI-EM Global series of indices, with 27 bonds under the Fully Accessible Route eligible for inclusion.
