FPIs up investment in G-Secs under FAR as Indian bond inclusion nears

Bonds

Foreign Portfolio Investors (FPI) have stepped up investment in Indian government securities (G-Secs) under the Fully Accessible Route (FAR) as inclusion in the JP Morgan bond index draws near.

This has resulted in an increase in ownership of some securities, especially old and new benchmark bonds, per data from the Clearing Corporation of India.

According to the CCIL, FPI ownership in 7.18 percent 2033 bonds stood at 11.73 percent on June 13, compared to 8.80 percent on April 2.

Similarly, FPI ownership in the new benchmark bond, the 7.10 percent government security maturing in 2034, stood at 2.97 percent on June 13, compared to 1.56 percent on April 26.

FAR enables non-residents to invest in specified government of India dated securities without any investment ceiling.

JPMorgan Chase & Co will add the securities to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024.

“It is expected that both new and old benchmark bonds would have good presence in the index, and as the inclusion is nearing, FPIs might want to capitalise on the opportunity beforehand by increasing their holdings in both these securities under FAR,” said Umesh Kumar Tulsyan, Managing Director, Sovereign Global Markets, a New Delhi-based fund house.

Vijay Sharma, Senior Executive and Vice President of PNB Gilts, also said that FPIs have increased their holdings in old and new benchmark bonds under FAR because inclusion in the bond index is nearing.

Also read: RBI governor says no worries on heavy inflows from global bond inclusion

What does the data say?

In absolute terms, the indicative value of FPI holdings in 7.18 percent 2033 bonds stood at Rs 23,577.081 crore on June 13, out of Rs 2.01 lakh crore worth of outstanding securities.

The indicative value of FPI holdings in the new 10-year benchmark bond, the 7.10 percent government security maturing in 2034,  stood at Rs 2,373.522 crore, out of a total outstanding of Rs 80,000 crore, per CCIL data.

“Holding of the new benchmark bond should increase more than the old one as the supply of the new bond is still limited and will increase when the government's annual borrowing calendar for this fiscal kicks in,” Tulsyan said.

FPIs hold 9.95 percent of the 7.06 percent 2028 bonds, 8.94 percent of the 7.37 percent 2028 bonds, and 8.46 percent of 5.74 percent 2026 government securities.

Also read: No immediate 'hot money' worries over bond inclusion given low FPI presence

Bond inclusion
On September 22, 2023, JPMorgan Chase & Co had said that it will add Indian government bonds to its benchmark emerging-market index. India will have a maximum weight of 10 percent on the index.

The index inclusion follows “the Indian government’s introduction of the FAR programme in 2020 and substantive market reforms for aiding foreign portfolio investments,” the team led by the firm’s Global Head of Index Research, Gloria Kim, said in a statement. Almost three-quarter of the benchmark investors surveyed were in favour of India’s inclusion in the index, they said.

On March 5, 2024, Bloomberg Index Services (BISL) said it will add India's FAR bonds in the Bloomberg Emerging Market Local Currency Index from January 31, 2025.

The inclusion of these bonds will be phased in over a 10-month period starting on the rebalance date of January 31, 2025, a Bloomberg Fixed Income Indices document showed.