Tuesday, July 23, 2024

Global Inclusion of Indian Bonds: A Big Positive, needs careful monitoring

Vipin Malik, Chairman & Mentor, Infomerics Ratings, and Sankhanath Bandyopadhyay, Economist, Infomerics Ratings share their point of view.

J.P. Morgan has started including Indian bonds since 28th June 2024 into its Global Bond Index-Emerging Markets (GBI-EM) with an overall weight of 10% (the individual country cap) in the GBI-EM Global Diversified Index. A present, there are 29 Indian government bonds with $330 billion equivalent amount outstanding under the Fully Accessible Route (FAR), which is likely to bring in about USD 20~25 billion of passive asset allocation to Indian local currency government bonds over the 10-month course of inclusion.

Since 28th June 2024, the inclusion has started at a rate of roughly 1% weight every month for 10 months, ending on 31st March 2025, as highlighted in a report by Invesco. The maximum weight of 10% in the GBI-EM Global Diversified Index, 8.7% in the GBI-EM Global Index, and 14.59% in the GBI-EM Global Diversified IG 15% Cap Index is anticipated for the index weighting of India bonds.

The Indian bond market has prevented foreign ownership for the past twenty years, in contrast to the country’s equities market, which was entirely opened to international investors in 1993. Now, the addition of the India’s G-Sec into the Global Emerging Markets (EM) Bond Index in June 2024 as well as 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, would be a boon for the Indian bond market. More importantly, as highlighted in the Bloomberg website “Once completely phased into the Bloomberg Emerging Market 10% Country Capped Index, India is expected to join both China and South Korea as markets that reach the 10% cap. Within the market cap weighted version of the index, India is expected to be the third largest country after China and South Korea. Using data as of January 31, 2024, the index would include 34 Indian securities and represent 7.26% of a $6.18 trillion index on a market value weighted basis.”

India’s 10-Year sovereign bond yield remains almost flat at around 7.01 per cent, it traded in the range of 6.90%-7.03% in Jun’24 from 6.97%-7.14% in May’24. As of June 24, 2024, the yield on the benchmark 10-year government bond (6.971%) had already dropped below 7%.  The fall in the yields could be due to anticipated interest rate cuts, softening inflation expectations going forward, and the RBI’s ongoing assistance through its GSAP (Government Securities Acquisition Programme). A fall in yields also lowers borrowing costs for the government. On 3 July 2024, the benchmark 10-year yield ended at 6.9987% amid a pullback in US treasury yields, while the incoming data of foreign inflows is still under assessment. Nonetheless, the 4th of July’2024 is a “red letter day” for the Indian economy as the benchmark Sensex crossed 80k.

Additionally, another interesting news is that the HDFC Bank, India’s largest private sector lender, is expected to witness inflows of up to $4 billion as its weightage in the MSCI indices is set to rise. The bank’s weightage in the MSCI Emerging Markets index may surge from 3.8% to 7.2-7.5%, attracting significant inflows. Domestic mutual funds’ holdings in HDFC Bank also rose.

It is expected that the inclusion of Indian bonds in the JPMorgan index will bring $20–25 billion in foreign capital into domestic debt. The rise in foreign investment is also attributed to non-resident interests, which are expected to double from 2.5% to 4.4% in the coming years. The actual flows may be higher, contingent on market dynamics and active flows. For last couple of years, foreign investors prefer other EM markets including India over countries like China due to slowdown and other issues and Russia due to the geopolitical risks etc. However, whereas such inflows would help in streamlining G-Sec yields and thus lower the overall cost of borrowing, there is a potential risk of upward pressure on India’s exchange rate, which needs to be carefully monitored.


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