Citi sees India allure enticing global bond funds to stay

Citi sees India allure enticing global bond funds to stay

Global investors who’ve bought Indian government bonds to piggyback on their inclusion in a flagship debt gauge are likely to remain invested and not take a quick profit, according to Citigroup Inc.’s top local trader.

India’s debt yields are higher than China’s or the US, and its economy is the fastest-growing among the Group of 20. There’s little reason for active investors who’ve poured money in to reverse course as the JPMorgan Chase & Co. index inclusion goes live, said Aditya Bagree, head of India and South Asia Markets for Citi.

“Some of the active money does come in beforehand as they expect the passive money to come in later and then they use that opportunity to get out of the position,” he said. “But in India, I don’t think that’s necessary how it’ll play out given the structurally good story.”

India, where Prime Minister Narendra Modi just won a third term in office despite his party losing its parliamentary majority, will ultimately receive 10% weight in the JPMorgan index. Bagree estimates the inclusion will attract almost $30 billion of capital into India, from both active and passive investors.

Since the change was announced last September, non-residents have already ploughed about $10 billion into the bonds eligible for inclusion in the gauge, Clearing Corporation of India Ltd. data show. But the frenzy may slow, if China’s experience is any guide.

The index inclusion goes live on June 28.

While the unexpected election outcome triggered a debt market selloff amid fears officials would boost expenditure to placate voters, bonds have since largely recovered. The reappointment of Nirmala Sitharaman as finance minister this week is considered a sign of fiscal continuity.

“We do think they have enough buffer to not really have to compromise on the 5.1% deficit number which was projected in the interim budget,” Bagree said, referring to the recent $25 billion dividend payout by the central bank to the government.

Bagree said the 10-year yield may drop to between 6.80% and 6.85% — from just around 7% currently — if the government sticks to fiscal consolidation in its upcoming budget. Signs of the Federal Reserve and the Reserve Bank of India preparing to cut rates may even trigger a drop to 6.5%, he said.

“Being long IGBs is one of the biggest conviction trades in the region,” he said.