By Subhadip Sircar, Ronojoy Mazumdar and Malavika Kaur Makol
India’s $1 trillion government bond market has struggled for years to rise above the criticism of being insular.
That is set to change after JPMorgan Chase & Co. Thursday became the first global index provider to include them on its emerging markets index. The decision sets the stage for billions of dollars of inflows just when the bond market is straining under record government borrowings.
“This could be a push-factor to prompt foreign inflows into India and foreign investors are likely to be more active in the Indian fixed-income market,” Morgan Stanley strategists led by Min Dai wrote in a note, calling the index inclusion a “milestone event.”
Inclusion starts in phases from June 2024. India will reach a maximum 10 per cent weighting in JPMorgan’s key emerging market index, which has $213 billion benchmarked to it.
Goldman Sachs Group Inc. expects inflows of more than $40 billion from active and passive funds over the next 18 months. The purchases will be “front-loaded, beginning immediately, as investors pre-position for inclusion,” strategists led by Danny Suwanapruti wrote in a note Friday.
Foreign investors currently hold less than 2 per cent of government securities. Officials have in the past worried about the consequences of outsized debt inflows, leaving local banks and mutual funds as the main buyers of bonds.
Kotak Mahindra Bank expects foreign ownership to rise to 3.5 per cent-4 per cent by the end of fiscal 2025, as investors plow money into a high-yielding market.
Benchmark 10-year yields can drop to 6.9 per cent-6.95 per cent over the next six to eight months if the global environment improves, said Jayesh Mehta, India country treasurer at Bank of America in Mumbai.
They closed at 7.19 per cent on Friday.
Bloomberg LP is the parent company of Bloomberg Index Services Ltd., which administers indexes that compete with those from other service providers.