Indian bond yields to trade in 6.75-7.00% range post JP Morgan bond inclusion, say experts

On September 22, 2023, JPMorgan Chase & Co. announced that it would add Indian government bonds to its benchmark emerging-market index.

Index inclusion follows “the Indian government’s introduction of the Fully Accessible Route (FAR) program 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.

Madhavankutty G., Group Chief Economist at Manappuram Finance, said the inclusion would be spread over 10 months and we would see inflows of an additional $20 billion in this period.

Also read: What inclusion of India Bonds in the JP Morgan Index means

Easing yields

Since the announcement of the inclusion of Indian bonds in the global bond index, the yield on 10-year benchmark bond has eased around 15-20 basis points (bps). One basis point is one-hundredth of a percentage point.

The yield on the 10-year benchmark bond 7.10 percent 2034 was at 6.9896 percent at 1:15 PM on June 26, as per Clearing Corporation of India’s (CCIL) data.

“Yields have come down since the inclusion was announced with the 10Y easing 20bps due to foreign inflow in secondary market debt as well as other positive domestic developments which softened bond yields,” said Achala Jethmalani, Economist at RBL Bank.

During this period, investment by foreign portfolio investors in the Indian government bonds under FAR securities has increased sharply.

As per CCIL data, FAR holding of foreign portfolio investors has increased more than 93 percent till June 26 since the announcement of bond inclusion.

Currently, it stands at Rs 1.83 lakh crore, as compared to Rs 94,709.302 crore on September 22, 2023.

FPI ownership in 7.18 percent 2033 bonds stood at 11.86 percent on June 26, 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 4.42 percent on June 26, 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.

Impact on rupee

Experts say that post inclusion, the Indian rupee is expected to appreciate and outperform all other major currencies during the year.

“We expect INR (Indian Rupee) to outperform all other major currencies during the year,” said Sharma from PNB Gilts.

Jethmalani from RBL Bank added that several pull and push factors are at play. “But we see an appreciation bias play out over the next few months. The USDINR pair is seen in range of 82.50-84.00. The RBI strategy in FX management will hold key,” she said.

At present, the Indian rupee is trading at 83.4775 against the US dollar.

However, Madhavankutty G. said the rupee should now track the movement of the Chinese currency and if the yuan is devalued to boost growth and exports then the rupee will actually face some downside pressure.

"We have to understand that the dollar index has strengthened to 107+ and a yuan devaluation will add further strength to the USD. In such a scenario INR will face pressure from an already strong dollar and a devalued yuan," he added.

Also read: Bond bulls lift India bets ahead of index inclusion

Will RBI intervene?

The Reserve Bank of India (RBI) is likely to ensure that there is less volatility in the market post the inclusion of bonds, experts said.

“The RBI may ensure that there is less volatility in the INR and we also expect the RBI to continue sterilisation of the dollar inflows in the FX market through different ways,” Sharma added.

He further said there is also a possibility of RBI intervention through the bond market to take away some rupee liquidity in the later part of the year.

In the June monetary policy, RBI Governor Shaktikanta Das said there were no worries over expected heavy inflows from the global bond inclusion.

"The RBI has a number of instrumentalities, we have managed it in the past, we will manage it this time also. No worries on that," Das said during the post-policy media conference on June 7.