The Indian government bonds are on course to become global index players in 2024 as HSBC Mutual Fund predicts the potential for a $100-billion inflow into the Indian markets through strategic allocations over the next 3-5 years.
Factors driving interest include a large and liquid market, a robust macro-economic framework, favourable risk-adjusted rewards, diversification benefits, high yields, foreign exchange reserves stability, JP-GBIEM index inclusion, and anticipated increased foreign portfolio investment.
This inclusion will trigger inflows of as much as $50 billion, a similar amount of flows is also expected from large institutional investors.
HSBC said sovereign wealth funds, central banks, and major institutional investors like endowments and pension funds are poised to closely monitor and acquaint themselves with the Indian bond markets for their emerging market allocations. With operational hurdles resolved and investors recognising the positive aspects of India's bond markets, HSBC Mutual Fund anticipates a shift towards strategic allocations by large global institutional investors, going beyond merely including them in their EM index allocations.
"This, combined with approximately $50 billion from index-related flows, could potentially result in incremental foreign portfolio investment (FPI) flows reaching around $100 billion in the next 3-5 years, while maintaining foreign investor participation at just 8-9 percent of the market," it said.
India's growth trajectory remains robust, positioning it to become the world's third-largest economy by 2027. The stock markets reflect this success, boasting a market cap of nearing $4 trillion, with FPIs holding approximately 16 percent, totaling $650 billion.
India will be included in JP Morgan’s GBI-EM Global index suite from June 28. India is poised to reach a maximum weightage of 10 percent in the GBI-EM Global Diversified and 8.7 percent in the GBI-EM Global index. Currently, 23 Indian government bonds (IGBs) worth $330 billion are index-eligible, with GBI-EM GD accounting for $213 billion of the total $236 billion benchmarked to the GBI-EM family of indices. Only IGBs designated under the Fully Accessible Route qualify for index inclusion. India holds a 'BBB-' rating from Fitch and S&P and a Baa3 rating from Moody's for its local currency debt.
According to recent news reports, Bloomberg Index Services Ltd, a global index provider, seeks input through a consultation on including India's Fully Accessible Route (FAR) bonds in its emerging market local currency index. FAR bonds have no investment restrictions for foreigners.
This inclusion signifies the potential for substantial incremental flows, as observed in China since 2019. Beyond being a culmination of policy reforms and economic enhancements, the tailwind from index-related inflows is expected to propel large institutional investors towards strategic, standalone allocations in the Indian bond market, HSBC report added.
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