Indian bond index inflows may lag estimate, says Morgan Stanley

Foreign ownership of FAR bonds increased from 3.5% to 6% of the outstanding amount in 2024, the Morgan Stanley strategists said.

Indian bonds included last year in a key global benchmark will fail to draw as much money as previously estimated, according to Morgan Stanley.

Fully accessible route bonds — those offered to global investors without limits — will fall short of an initial $25 billion to $30 billion passive flow that was estimated to come in after their inclusion to the JPMorgan Government Bond Index-Emerging Markets, analysts Nimish M. Prabhune and Gek Teng Khoo wrote in a note.

They cited pressure on the Indian rupee, rising US Treasury yields, a hawkish Federal Reserve stance and uncertainties around US trade policy as reasons for the shortfall. In addition, most emerging-market government-bond-index funds are active managers “who are not bound to add positions on the index rebalancing date,” they added.

Their prediction comes as markets everywhere prepare for a volatile 2025, marked by tariff disputes expected during Donald Trump’s second stint as US president, as well by a US dollar seen staying strong as the American economy remains resilient. That would exert pressure on emerging market assets including currencies.

Morgan Stanley’s forecast would be a comedown from initial predictions about the rush of money expected to flow into Indian markets on account of the index inclusion. India currently has a weight of 7% in the JPMorgan gauge, and that’s expected to rise to the maximum of 10% by March.

Foreign ownership of FAR bonds increased from 3.5% to 6% of the outstanding amount in 2024, the Morgan Stanley strategists said.

The rupee fell nearly 3% against the dollar last year, a seventh straight year of declines, as outflows from stocks and gains in the dollar weighed on the currency. That’s despite the Reserve Bank of India intervening to blunt volatility in the currency. While the rupee is one of the most steady across emerging markets on a one-year basis, hedging costs for foreigners have shot up, eating into returns from local currency bonds.