India to be part of JP Morgan global bond index, could get $25bn inflows

“… this could prompt overall ~$26 billion of passive inflows as a one-off stock adjustment over the scale-in period, while actual flows may be higher, depending on market dynamics,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services. A Goldman Sachs report said the move could prompt passive inflows of around $30 billion (comprising emerging market local dedicated funds, as well as blended funds) over the scale-in period as a one-off stock adjustment.

However, given India’s attractiveness from a yield and (low) volume perspective, it could attract at least another $10 billion of active flows. “So in total, we think India’s fixed income markets could see inflows upwards of $40 billion over the next one and a half years (where the phase-in period will be completed by March 2025),” the Goldman Sachs report said. It said as several emerging markets dedicated funds are already set up on India, the flows will be front-loaded, beginning immediately, as investors pre-position for inclusion next year.

“Naturally, there will be a tendency for the currency to appreciate just as it happened between 2003 and 2008 and capital inflows into India surged. Therefore, when there is a demand for investors to buy Indian government bonds denominated in rupees then naturally the demand for rupees will increase and everything else being equal, it will lead to a potential for rupee’s nominal appreciation. So that is both a positive and a challenge because we have to make sure that the rupee stays competitive as well. In that sense, there is a potential for currency appreciation when the index inclusion starts to happen and the demand from investors for Indian government securities starts to rise,” Chief Economic Advisor in the Union Ministry of Finance V Anantha Nageswaran said.

Citing estimates by various brokerages, Nageswaran said the move would lead to inflows of $20-25 billion. He pointed out that with the bond inclusion, the investor base will widen and relieve Indian financial institutions from being one of the biggest buyers of government bonds to lend for more productive purposes and the private sector. “…and naturally the financing of the current account deficit becomes that much easier because it is by-and-large believed that these investors are long term and patient investors and they are not fickle or hot-money flows. So these are all the advantages that we all know about,” he said.

The CEA, however, noted that there will be challenges in terms of the rise in sensitivity of domestic policy to external spillovers. For which, he said, fiscal and monetary priorities will need to be cognisant of global perceptions and “macro-prudential policies will become critical down the road”. “We need to keep an eye on what foreign investors would be thinking, what will happen to bond yields, currency, etc. and sometimes, during globally uncertain times, unrelated to Indian macro-fundamentals,  there could be volatility in the Indian bond market or in the currency because of the inclusion or holding of Indian G-secs by foreigners. That is something we need to be prepared for and prepare ourselves and also think about accordingly. Therefore fiscal and monetary policies need to be cognisant of the global perceptions,” Nageswaran said.

The Reserve Bank of India (RBI) has been engaging with other index providers, including FTSE Russel and Bloomberg-Barclays, for the inclusion of IGBs in global bond indices. Post the inclusion into JP Morgan EM Bond Index, India’s chances of inclusion into Bloomberg Global Aggregate Index also rises, IDFC First Bank said in a note. “In case India is included in the Bloomberg Global Aggregate Index, it could result in inflows of $15 billion to $ 20 billion with India’s weight ranging from 0.6 per cent to 0.8 per cent,” it said.

The news of inclusion helped the yield on the 10-year government bond – 7.26 per cent – 2033, ease. It opened at 7.08 per cent but ended at 7.18 per cent on profit booking and in anticipation that the RBI will not purchase government bonds through open market operations (OMOs) given the higher flow of funds. The rupee also closed 16 paise down at 82.94 on Friday, compared to previous closing of 83.09.

According to Clearing Corp. of India data, foreigners have raised their holdings of Indian government bonds to almost $12 billion from $7.4 billion at the end of 2022, in anticipation of the inclusion. So far in the calendar year 2023 (till September 22), foreign portfolio investors (FPI) have invested Rs 28,476 crore in the country’s debt market compared to an outflow of nearly Rs 9,000 crore in the same period of 2022. FPIs have turned net buyers of the domestic bonds on hope India will be included in global bond indices, improving growth prospects, lower inflation compared to other economies and stable rupee.

Overseas investors have been net buyers of domestic debt for all the nine months (till September 21) of 2023 except in March when they had net sold Rs 2,505 crore of bonds. In the calendar year 2022, FPIs had net sold Rs 15,911 crore of Indian debt, according to the National Securities Depository Ltd (NSDL) data.

“There have been some sentiments that India is expected to be included in global bond indices. As Russia is out, obviously some other developing economy has to be included, and India is the only country which qualifies,” said Madan Sabnavis, Chief Economist, Bank of Baroda. With more clarity on its future growth prospects, the country will be a natural candidate to be part of global bond indices, he said, adding that even if inclusion does not materialize immediately, it indicates that India is among the best performing economies, which is boosting the sentiments of FPIs.

IIFL Securities Fund Manager Ujjwal Shah said  that in the short term, things look quite attractive (in India). “…and we are seeing a lot of investments by FIIs in debt because of a good and stable inflationary and interest rate scenario,” he said.

In July this year, an Inter-Departmental Group (IDG) of the RBI, headed by Executive Director Radha Shyam Ratho, recommended the central bank should step up measures to engage with index providers for the inclusion of IGBs in global bond indices. It also suggested recalibration of the FPI regime to facilitate a more conducive environment for foreign investments into the Indian debt markets (both government and corporate).