JPMorgan bond inclusion largely positive but near-term headwinds to control immediate gains: SBI MF

JPMorgan Chase & Co. will add Indian government bonds to its benchmark emerging-market index, a keenly awaited event that could drive billions of foreign inflows to the nation’s debt market.

The decade-long wait has ended, with JPMorgan’s inclusion of India bonds in its emerging markets government bonds index. The markets were not too excited though, at best giving the move a mild hat tip. That’s mainly as the data shows that it was largely priced in, said Rajeev Radhakrishnan, CIO-Debt, SBI Mutual Fund. Also, while the move is largely positive, there might not be an immediate impact on the currency or foreign inflows. Edited excerpts from the interview:

The market does not seem very surprised with the move. The bond and currency markets have not shown the kind of positivity one would have expected on such a big positive news that we have been waiting for. Why?

Yes, the market is really not surprised because investors have been asking for this for a long time. The move is actually a result of several external factors. Russia was excluded from all the indices after the Ukraine issue, so China had max weight in the index. So there has been discomfort in the investor community that the index is very concentrated, and there must be an alternative larger market in the index. So, this is the result of investors seeking diversification rather than any sort of enablement by the government.

On the contrary, the government has increased the withholding tax which has added to roadblocks. On the external front, over the last few weeks, there's been material negative data as well. You had higher inflation, crude going up, reasonably tight liquidity, treasuries at four and a half… but in spite of that negative data, bond yields were stable because the market was expecting this news.

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And when you look at the data over the last one year, there has been about $4 billion odd FPI inflow into index-eligible bonds, so this news has been very much in the price. That’s the reason why the market reaction immediately is not very exuberant as one would have anticipated for a big move like this.

How do you see this move impacting yields hereon – near term and medium term?

Near term, nothing is going to change remarkably because we are seeing considerable headwinds but now that JPMorgan has added India to the index, other index providers will also consider adding India to their indices; so that is positive longer-term. But immediately, there is no reason for bullishness because right now, from a global bond investor perspective, if investors are getting 5 percent plus in one-year US treasury and 4.5 percent on 10-year US treasury, why would they really take that emerging market risk? No one is going to jump in and buy any emerging market bonds today. That’s the reality at this point in time. I don't see a very compelling reason to buy emerging markets with their associated currency risk.

What is your take on the rupee? How does this move impact the rupee trajectory in the near term and the longer term?

This is obviously positive for the rupee as foreign money is set to flow in but we have to see the overall context in the near term. When the flows start to come, we have to see how the RBI deals with this. Now, RBI has been trying to reduce liquidity, so for (all) you know the central bank may be happy to sell bonds while the FPIs buy into them, which means the net impact on bond yields will be neutral... but other factors such as capital (equity) flows, crude prices are still unstable. Net-net, for now, this is sentimentally positive but is it not going to move the needle for yields or currency in the near term. Over a two-year period, it’s a clear positive.

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