Investment by foreign portfolio investors (FPI) in Indian government securities through the Fully Accessible Route (FAR) rose 35 percent since JP Morgan announced that Indian bonds would be included in the JP Morgan Emerging Markets Bond Index, per data from the Clearing Corporation of India (CCI).
FAR enables non-residents to invest in specified government of India dated securities without any investment ceilings.
According to the data, as of December 20, FPI investment in FAR securities had risen 35 percent since September 22, and 65 percent since April 3.
“As most FAR securities are eligible for inclusion in the index, we saw a sharp jump in the allocation to these securities,” said Mataprasad Pandey, Vice President, Arete Capital Service, a Mumbai-based investment advisory firm.
Money market experts said the spike is also because of expectations of increased inflows post the inclusion of the securities in the index.
On September 22, JPMorgan said that it would include Indian government bonds in its widely-tracked emerging market index starting June 28, 2024.
The inclusion of India’s sovereign bonds could potentially draw $30 billion of foreign inflows into the country.
The move has significant implications for investors in India's debt market, with India's weight in the index going up to a maximum of 10 percent, and eligible government bonds valued at $330 billion, analysts said.
As per experts, most FAR securities will be included in the bond index. However, demand for 5-year and 7-year securities will be more as foreign players prefer these, said Pandey.
Besides foreign investors, FAR securities are available to domestic investors as well. Earlier this year, the RBI had included sovereign green bonds to the list of FAR securities.
Also read: Spread between 10-year G-Secs and SDLs narrowed in last two weeks
The numbers
In absolute terms, FAR holdings of FPIs stood at Rs 1.28 lakh crore on December 20, 2023, compared to Rs 94,709.302 crore on September 22, 2023, and Rs 77,441.358 crore on April 3, per CCIL data.
FPIs hold 18.38 percent in 7.37 percent 2028 bonds, followed by 9.88 percent in 7.32 percent 2030 bonds, and 8.65 percent in 7.06 percent 2028 bonds.
In the 10-year 7.18 percent benchmark bond, 2023, FPIs hold around 5.78 percent through the FAR route. In absolute terms, that comes to Rs 7,917.309 crore.
Another index inclusion?
Money market experts said that foreign players are also increasing their investments because they are hopeful of another index inclusion.
“The rise in FAR holdings of FPIs can also be attributed to the hope that Bloomberg will add Indian government securities to its bond index,” said a fund manager with a mid-sized fund house.
On October 31, 2023, Moneycontrol had reported that the domestic market was hopeful that Bloomberg will add Indian government securities to its bond index soon, spurred by optimism over reports of their “potential eligibility” for inclusion.
Sources say the optimism is because members of the Bloomberg Fixed Income Index advisory council are the same as those on JPMorgan’s advisory council.
“The FAR securities are likely to be included because there are no restrictions for FPIs,” one person added.
Experts said that if Indian government bonds are included in the Bloomberg index, they could carry a 0.7-0.8 percent weightage.
Also read: Inclusion in JPM bond index a vote of confidence for India: RBI governor
Impact on bond yields?
The yields of Indian government securities are expected to ease once the bonds are included and flows start, according to market analysts.
However, they added that the reduction in yields will not be much, considering domestic factors.
“I do not see a significant reduction in yields post (index) inclusion. Yields will majorly move on the basis of Indian macros, such as inflation / interest rates, demand and supply, etc.,” Pandey added.
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