Government borrowing cost set to fall in FY25 after Indian bond inclusion in global index: Experts

Government bonds

The government’s borrowing cost is likely to fall in the next financial year due to inflows of foreign funds after the inclusion of Indian bonds in JPMorgan’s Emerging Market Bond Index, experts said.

“We expect the cost of borrowing to reduce as we expect the rate cycle to ease in the second half of FY25 and increased demand from new investors will also act favourably,” said Akhil Mittal, a senior fund manager, fixed income, at Tata Asset Management.

JPMorgan said on September 22 that it would include Indian government bonds in its widely tracked emerging market index starting June 28, 2024. About $23.6 billion of inflows from foreign portfolio investors are expected from July 2024 to May 2025, experts said.

Gaura Sengupta, an economist at IDFC First Bank, said the real impact on government security yields will be felt in FY25 when foreign portfolio investment inflows will start through the Fully Accessible Route (FAR). The Reserve Bank of India introduced FAR in March 2020, allowing FPIs to invest in government securities without any restrictions.

According to an Emkay Global Financial Services’ report, about 35 percent of the outstanding G-Secs are FAR bonds (FAR outstanding: about $400 billion or 3 percent ownership from FPIs) and, incrementally, 75-80 percent of new issuances are FAR bonds (5-year, 10-year, and 30-year).

“At present, 23 FAR bonds with a combined value of $330 billion are eligible for inclusion in the index,” Emkay said in the report.

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The yield on the benchmark bond is likely to trade 50-70 basis points (bps) lower from current levels on expectations of heavy inflows from foreign investors along with demand from local investors such as banks and pension funds, experts said. One basis point is one-hundredth of a percentage point.

Mittal of Tata Asset Management said the 10-year benchmark bond yield will likely trade in the range of 6.50-6.80 percent by the end of FY25.

Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said FPI debt inflows are expected to support the 7-14-year bucket of bonds, with limited gains given the scope for open market operation (OMO) sales.

“The far end of the curve should remain well-supported, given low net issuance and long-term investors’ demand,” she added.

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Some experts said the inclusion of Indian government bonds to the JPMorgan index could lead other indexes to add them.

A report from IDFC First Bank said if 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 percent to 0.8 percent.

If India’s inclusion takes place, it could be in one go, given the relatively small weight. The country’s weight in the BGAI will increase as the market capitalisation of FAR securities rises, the report added.