JPMorgan index-bound Indian bonds lure foreigners, but flows to start later

Foreigners have more than doubled purchases of Indian government bonds that would form a part of JPMorgan’s emerging market bond index, but bank treasury officials do not expect large inflows until the inclusion starts next year.

 

Foreign investors bought bonds under the ‘Fully Accessible Route’ or FAR worth over Rs 2,300 crore ($276.25 million) on an average in each of the three weeks since Sept. 22 when JPMorgan said it would include 23 such securities in its widely tracked index from June 2024 onwards.

 

This was more than double the pace of buying seen in 2023 ahead of the announcement, Clearing Corp of India data showed.

“There have been inflows as some investors, which were eyeing the inclusion, have come in now,” said Ashutosh Tikekar, head of global markets at BNP Paribas India.

 

“This pace, however, may not sustain at least in the immediate future as globally investors will eye developments in the Middle East conflict and what impact it could have on oil prices.”

 

Foreign investors now hold Rs 1.02 trillion or 3.5 per cent of the outstanding securities in the FAR category.

 

Their largest purchases were in the benchmark 7.18 per cent 2033 bond and five-year 7.06 per cent 2028 paper, which have seen inflows of around Rs 3,400 crore and Rs 2,500 crore, respectively, since Sept. 22.

 

FAR category bonds do not have limits on foreign investments, unlike other bonds.

 

“Two-thirds of index-eligible securities have residual maturity between 5-14 years. So, we can expect a bulk of inflows in that segment,” said Nagaraj Kulkarni, co-head – Asia rates strategy (ex-China) and head – flows strategy at Standard Chartered Bank.

 

He expected inflows of around $20 billion to $25 billion from now till the completion of the inclusion in early 2025, but the inflows are likely to pick up only closer to the date.

 

“We are still waiting for better entry levels to recommend long positions in IGBs (Indian government bonds),” Kulkarni said.

Any large pick-up in the flows will be hampered by the expectation that global interest rates will remain higher for longer, reducing the attractiveness of Indian assets.

 

“With concerns about higher for longer (rates), and the possibility of the U.S. 10-year yield hovering around 5 per cent , fund managers may wait for a few months before committing substantial investments,” said Ashhish Vaidya, managing director and head of treasury and markets, DBS Bank India.

 

Vaidya expected inflow of approximately $23 billion over the period of inclusion.