JP Morgan's Indian bond inclusion likely sparks foreign investment surge

Inclusion in this global benchmark is a major win for India, as it attracts a significant pool of global capital for bond allocations, leading to increased foreign exchange inflows.

JP Morgan's inclusion of Indian bonds in its emerging-market index is expected to attract significant foreign investments, bolstering the Indian rupee amidst a weakening current account due to rising oil prices, analysts said.

Indian bonds will make up a maximum of 10% in the index, with HSBC estimating potential flows of up to $30 billion. To provide perspective, the highest net foreign inflow into Indian bonds in 2014 was approximately $26 billion, while year-to-date inflows as of September 20 stand at around $3.5 billion, indicating significant future potential.

"Inclusion in this global benchmark is a major win for India, as it attracts a significant pool of global capital for bond allocations, leading to increased foreign exchange inflows. This supports the Indian Rupee and broadens the buyer base for Indian bonds, enhancing demand diversification. Stable bond yields and a steady currency will positively impact India's economic fundamentals, making Indian assets, including equities, more attractive" said Ritesh Jain Co-founder Pinetree Macro, Trend watcher and strategic advisor.

Analysts point out three major EM bond indices: JP Morgan EM bond index, FTSE EM bond index, and Bloomberg Barclays EM bond index. JP Morgan's EM bond index and Bloomberg Barclays' EM bond index both have around $230 billion in assets under management (AUM) tracking them. However, active flows are expected to closely mirror passive flows, and this trend is anticipated to continue.

"Considering this, we can estimate total flows to be at least $40-50 billion in the medium term (6-12 months) if IGBs get included in all three indices. This is a significant number because not only it provides an alternative source of financing for government borrowings, it opens up the space for corporate issuers as well as bringing the entire yield curve down significantly once all the inclusions are in place", said Satyakam Gautam, Rates trader, ICICI Bank on its LinkedIn profile.

Gautam further added that as national banks' balance sheets become more available, they can allocate more funds to the private sector. However, this also increases fiscal responsibility for the government, as these flows closely align with its fiscal decisions. Given India's advantageous bid-offer spread in fully accessible route (FAR) securities compared to current EM index constituents, and the substantial size of FAR securities available (amounting to $380 billion ), which are currently under-owned by FPIs, the potential for significant FPI inflows is substantial.

"With USDINR FX vols being well managed by the central bank, the case for FPI inflows into FAR securities becomes stronger. Currently FPIs hold only 3% (12 BN USD) of the FAR securities which can easily go to 10% over the next 6-12 months", Gautam added.