Billions Of Foreign Inflows Seen; India Debuts In JP Morgan's Bond Index; To Likely Attract $20-25 Bn Flows

JP Morgan Chase & Co's inclusion of Indian government securities (GSecs) will come into effect from June 28, 2024. This is likely to attract billions of dollars inflow in Indian bond market. From foreign investors participation to driving flows in debt market and even lift currency over the medium term, the move is well in favour of India. As much as Rs 2.5 lakh crore flows is expected in FY25, while some experts believe foreign inflows could be around 20-25 billion dollars in the months to come.

Indian GSecs will be included in JP Morgan's GBI-EM Global index suite, effective from June 28, 2024. It is expected to reach the maximum weight of 10% in the GBI-EM Global Diversified Index (GBI-EM GD).

At present, there are 23 Indian government bonds with a combined notional value of $330 billion which are eligible for the index. However, the inclusion of the GSecs will be staggered over 10 months through March 31, 2025 (i.e., the inclusion of 1 per cent weight per month).

Indian bonds will emerge as the 25th debt market to enter JP Morgan's index.

In its note, JP Morgan highlighted that India has been on index watch since October 2021. With the latest inclusion, Indian bonds will have highest duration across its index at 7.03 years, while having an above average yield-to-maturity period of 7.09%.

Not just that India's inclusion will further lift EM Asia's weight in the GBI-EM GD index to 47.5% from 40%.. JP forecasts India to account almost half of the total weightage of EM Asia.

As per Nomura, India's inclusion to JP Morgan Index should generate increased activity. It added, "We maintain our estimate for India to receive INR2.5trn of inflows in FY25."

Also, Morgan Stanley in its note said, "We expect the current account deficit to remain benign at around 1-1.5% of GDP in F2025-26, supported by a steady trend in the merchandise trade deficit and an improving trend in the services trade surplus. As such, India's external balance sheet position is likely to remain strong, as also reflected in robust FX reserves, buoyant import cover and stable external debt/GDP. Furthermore, the inclusion of India in the GBI-EM index from June 2024 will likely trigger capital flows and bolster the balance of payments further."

Meanwhile, Edelweiss Mutual Fund had stated that aa 10% weight for IGB should attract ~US$ 21 billion (~Rs. 1.7 trillion) worth of investments in IGB by March 31, 2025 assuming investors have zero weight as of now and would like to be index neutral.

Post inclusion, SBI Research highlighted that India's weight is expected to reach the maximum weight threshold of 10% in the GBI-EM Global Diversified, and approximately 8.7% in the GBI-EM Global index (thus, ensuring likely passive flows of ~$24 Bn at current AUM/holdings by March'25).

Earlier, Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services, Waterfield Advisor highlighted the following boost to the Indian debt market because of the inclusion:

- Could act as a catalyst for much-needed bond market deepening.

- In the medium to long term, enhanced foreign participation could result in reduced yields on government bonds.

- That, in turn, may gradually (medium/long term) reduce the yields on corporate bonds too.

- Which in turn, could lead to a reduction in the cost of capital & cost of borrowing over the long term.

- Could have a positive impact on our currency in the medium to long run.

After the announcement by JP Morgan of adding Indian GSecs to its bond index, Sandip Raichura - CEO of Retail Broking and Distribution & Director, Prabhudas Lilladher Pvt Ltd has said that India could expect to receive close to $24 billion in foreign inflows over a 10-month period starting from June 24. In fact, foreign portfolio investors (FPIs) are already entering the Indian fixed-income market in anticipation of this inclusion. This inclusion is considered a major positive, as it will absorb more than 15% of the net supply of Government Securities (GSEC) for FY 25.

It needs to be noted that after JP Morgan announced to include Indian government bonds to its index, Bloomberg has followed suit. In March 2024, Bloomberg announced inclusion of India Fully Accessible Route (FAR) bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices, to be phased in over a ten-month period, starting January 31, 2025.