Index Inclusion for India Govie Bonds

India is poised to attract billions of dollars in additional inflows as JPMorgan Chase & Co. incorporates the country's government bonds into its emerging markets index on Friday, thereby opening up a $1.3 trillion market to a wider array of investors.

Since JPMorgan's announcement in September, global funds have already funneled close to $11 billion into index-eligible bonds. The US bank forecasts an inflow of $20 billion to $25 billion over the next ten months, which would increase foreign ownership from the current 2.5% to 4.4%.

Emerging market investors are increasingly favoring India's debt, drawn by the nation's strong economic growth and stable currency, underpinned by the central bank. Both sovereign and corporate bonds are on track for a sixth consecutive quarter of foreign inflows, a streak not seen in 11 years, according to Bloomberg data.

“Most of the inflows we’re observing are from index-tracking investors and should remain relatively stable,” said Vikas Jain, head of India fixed income, currencies, and commodities trading at Bank of America Corp. “A declining debt-to-GDP ratio, stable macroeconomic factors, and favorable demand-supply dynamics for India’s bonds are positive aspects.” For global investors, Indian bonds offer access to a high-growth, high-yield market. Over the past decade, India's sovereign debt has outperformed its index counterparts, according to JPMorgan. Indian government debt has been Asia's top performer this year, returning 5.3% compared to a 1.3% gain in Indonesian local currency bonds, Bloomberg data shows. On Friday, yields on the benchmark 10-year bond remained steady at 6.99%, while the rupee edged up to 83.3750 against the dollar. Yields have dropped around 20 basis points since JPMorgan's inclusion decision, and Australia & New Zealand Banking Group Ltd. anticipates they will decline to 6.8% in the near term.

"The RBI may have an opportunity to cut rates once in December, with further reductions possible in 2025, which could guide yields lower," Jennifer Kusuma, senior Asia rates strategist at ANZ, said on Bloomberg Television on Friday. "The market has already priced in much of the positive news regarding the inclusion."

Within the Fully Accessible Route bonds eligible for index inclusion, 28 securities valued at over $400 billion will grant India a 10% share in the index at its peak, similar to China's weighting.

"India's relatively high yields among other index constituents may persuade active managers to take an overweight position on these securities," wrote Radhika Rao, Senior Economist at DBS Group Holdings.

(all thoughts are private and no recommendation....to be continued)