Yields of Government Securities (G-Secs) ended almost flat on Friday, the first day of inclusion of G-Secs in JP Morgan’s Emerging Market Local currency Government Bond indices (GBI-EM GD) index. The reason for this is that the bond market has already factored in this event.
Yield of the widely traded 10-year benchmark G-Sec ended at 7.01 per cent against the previous close of 7 per cent.
Radhika Rao, Senior Economist & Executive Director, DBS, observed that notwithstanding, strong inflows ahead of the inclusion (Current Year To Date $9 billion; June witnessed $1.7 billion, almost entirely into G-Secs under the fully accessible route/FAR), monthly inflows are expected to be more gradual but persistent, adding up to incremental $18-20 billion over the phase-in period.
Bloomberg is also scheduled to add India’s bonds from January 2025.
“India’s relatively high yields amongst the other index constituents can potentially convince active managers to shift to overweight stance for these papers, along with the dedicated passive names. As it stands, positive real yields, low rupee volatility, a supportive macro backdrop, strong defenses against market volatility (record high reserves stock) and ongoing fiscal consolidation are key factors that make IGBs (India Government Bonds/G-Secs) attractive for investors,” Rao said.
In the near-term, DBS doesn’t expect these inflows to stoke material swings in the rupee or liquidity, courtesy the central bank’s active presence to minimise volatility.
“....Beyond the index inclusion, supply-demand dynamics will be under watch when the FY25 Budget is tabled. We don’t expect an increase in the scale of borrowings vs what was outlined back in the interim budget,” Rao said.
JP Morgan has forecast non-resident holdings of India Government Bonds (IGBs) to nearly double over the next year, from the current 2.5 per cent of outstanding to over 4.4 per cent, with authorities proactively implementing a wide range of measures to help improve the accessibility of the IGB market for foreign investors.
Gloria Kim, Global Head of Index Research-JP Morgan, said, “India has made market reforms for investors over the years and now meets index inclusion criteria. These reforms have improved the accessibility and tradability of India’s domestic market for the global investor base, which makes IGBs eligible for inclusion in the JP Morgan Emerging Market Local currency Government Bond indices. Assuming an index-neutral position, we expect foreign inflows to be between $ 20-25 billion following index inclusion, based on the estimated AUM tracking the GBI-EM GD and the expected 10% weight of India in the benchmark.”