In September 2023, JPMorgan had announced that it would include India in its emerging market bond index starting in June, where it will have a maximum weight of 10%. The firm estimates its emerging-market bond gauge currently has $216 billion of assets under management. Assuming an index-neutral position, the estimated foreign inflows in the Indian bond market will be between $20 billion and $25 billion.
Read here: JPMorgan says India index inclusion on track, most clients ready
Since the JPMorgan announcement, Indian sovereign bonds have seen about $8 billion of inflows into the so-called Fully Accessible Route securities, Bloomberg reported.
Moreover, Bloomberg Index Services Ltd. also has announced to include India to its emerging markets index from January.
The foreign fund inflows from the index inclusion are having a substantial impact on several Indian assets. While the corporate bonds are also besting peers, the foreign exchange reserves hitting a record high has helped the rupee shrug off the impact of a broad strengthening in the dollar. However, the major impact is likely to be on bond yields which are likely to drift lower going ahead.
Also Read: Bond yields expected to drift lower over next one year; What should investors do?
“The expected inclusion of Indian bonds in global indices like JPMorgan GBI-EM could trigger substantial inflows of $30-40 billion from foreign investors, deepening market liquidity. It may exert downward pressure on yields, reducing borrowing costs for India. The rupee could strengthen against major currencies,” said Atul Parakh, CEO- Bigul.
However, he believes the impact hinges on India’s ability to implement regulatory reforms, ensure market accessibility, and maintain fiscal/monetary prudence.
Globally, factors like US interest rates, emerging market risk sentiment, and currency fluctuations will influence investment flows, Parakh added.
Premal Kamdar, Analyst, UBS Securities India expects the 10-year Indian bond yield to remain rangebound in the near term before gradually dropping by 50– 75 bps by the end of the next financial year.
Also Read: Index inclusion a game changer for Indian fixed-income markets: Vishal Goenka of IndiaBonds.com
“Our view is supported by resilient macro conditions, fiscal consolidation leading to lower borrowings, and Indian government bond inclusion in global JP Morgan and Bloomberg bond indices leading to sizable FPI inflows in the debt market,” Kamdar said.
Meanwhile, the Reserve Bank of India (RBI) is expected to continue with its policy stance for some time. Given the current global and domestic macro backdrop, analysts see limited room for rate cuts this year and expect a shallow rate-cut cycle of 50 basis points (bps) by the RBI likely to commence in 2025.
Bond yields tend to move in advance of rate action.
Also Read: Abrdn to increase investment in Indian bonds amid index inclusion
Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund expects long bond yields to stabilise over the next few months and then drift lower over the course of the next one year.
“We expect the benchmark 10 year bond yield to go towards 6.50% by Q3 or Q4 of FY25. Investors with medium to long term investment horizons can consider funds having duration of 6-7 years with predominant sovereign holdings as they offer a better risk- reward currently. Investors having an investment horizon of 6-12 months can consider Money Market Funds as yields are attractive in the 1 year segment of the curve,” Pal said.
Dynamic Bond Funds and Gilt Funds are also likely to do well this year, he added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 11 May 2024, 02:34 PM IST
