No immediate 'hot money' worries over bond inclusion given low FPI presence

In September 2023, JP Morgan announced that eligible Indian bonds will be included in their GBI-EM Global Diversified Index from June 28, 2024. I

In June, Indian bonds will get included in JPMorgan’s global index. Even before the inclusion, worries have crept in over volatility in the bond market due to the whimsical nature of foreign portfolio investment (FPI) flows. But, according to a senior finance ministry official, concerns over “hot money” are not immediate given that the amount invested by foreign investors under the fully accessible route so far is not too large.

As per Clearing Corporation of India (CCI) data, investments under the FAR route stood at Rs 1.63 lakh crore as on May 20. FAR or Fully Accessible Route was introduced by the Reserve Bank of India in April 2020, allowing non-residents to invest in specified government bonds without any restrictions.

"The bond market is not a market where you can dump and go. You typically have long-term investors in this market. Though the FAR route has no limits when it comes to FPIs, total investments by foreign investors has not even reached 6 percent, which is the ceiling for government securities overall," this official said.

The official is referring to the investment limit on FPIs in government securities overall of 6 percent sans the FAR route .

According to this official, "Given tighter liquidity conditions, any volatility on account of the inclusion will be gradual and, therefore, in the short term, there isn’t much to worry. And the RBI has the tools to take care of the impact of any sudden outflows if required."

A recent Bloomberg report said that India’s vast foreign exchange reserves will be the first line of defence against any market volatility arising from an expected surge in inflows once the country’s bonds are included in global indices.

In September 2023, JPMorgan announced that eligible Indian bonds will be included in its GBI-EM Global Diversified Index from June 28, 2024. Its ultimate weight will likely reach the 10 percent cap and will be scaled in at 1 percent per month. The inclusion will be phased over 10 months till March 31, 2025. And, months later in March 2024, Bloomberg Index Services also announced its intention to add Indian sovereign debt to its Emerging Market Local Currency Government Index from January 31, 2025.

While the government has welcomed the move, it is also wary of its impact on domestic markets, with chief economic Adviser V Anantha Nageswaran noting in September 2023 that with this development, the government would need to keep an eye on what foreign investors think about domestic policy since even unrelated developments could impact local markets.

Economists have pegged the quantum of inflows following JPMorgan's addition alone at $24 billion over a 10-month period. Although investors tracking global bond indices are seen as long-term and stable, Indian authorities are still concerned about the impact that sudden, large outflows could have on financial markets.

But the official cited above said that whether inflows through the bond market can even be considered "hot money" is questionable given that FPIs in FAR securities are nowhere near a level that is worrying.

Back in September 2023, only 2.5 percent of the Rs 28.5 lakh crore worth of FAR securities were held by foreign portfolio investors.

Even Christian de Guzman, senior vice president at Moody’s Ratings, in an interview to Bloomberg on May 20 said that India’s economy will be able to smoothly absorb large inflows after the inclusion of Indian bonds in global indices.