Analysts see USD 25 bn inflow in debt market on Indian G-Secs' inclusion into JP Morgan index

Mumbai: Analysts expect the Wall Street major JP Morgan's decision to include the Indian government bonds in its global index from June next year will lead to a direct inflow of USD 20-25 billion in the country's debt market over 18-21 months.

JP Morgan, announcing the inclusion earlier in the day, said India will have a maximum weight of 10 per cent in the index eventually and around 8.7 per cent in the emerging market global index.

JP Morgan said in a statement on Friday that 73 per cent of investors are in favour the decision. The inclusion will be staggered over a 10-month period from June 28, 2024 to March 31, 2025.

"We estimate this implies direct inflows of USD 20-25 billion over the course of the next 18-21 months, but some front-loading of inflows cannot be discounted," Rahul Bajoria, managing director and head of emerging market Asia (ex-China) at Barclays, said in a note on Friday.

Japanese brokerage Nomura has pegged the inflows at USD 23.6 billion, which is 10 per cent of the USD 236 billion of asset under management tracking the index.

As many as 23 G-Secs (government securities) with a combined value of USD 330 billion are eligible for inclusion in the global index.

However, Bajoria said, the country's prospects of getting into other major bond indices such as the Bloomberg Global Aggregate Index and the FTSE Russell World Government Bond Index, remain low, as they need Euroclear-ability for settlements and a higher sovereign credit rating.

The 23 G-Secs, with USD 330 billion of notional value, represent 80 per cent of outstanding FAR bonds (USD 410 billion). Index inclusion should have a positive effect on FAR G-Secs during the inclusion phase.

Bajoria said foreigners' demand for G-secs via the 'fully accessible route' (FAR) will remain firm, especially given the prospects of front-loaded inflows.

Meanwhile, the G-Secs yields fell on Friday, while the rupee, which breached the 83-level against the dollar several times in the recent past, witnessed a rally on the index inclusion reports, despite facing headwinds due to a firm dollar, elevated US yields and higher crude oil prices.

Commenting on JP Morgan's decision, the government said the move will bring down borrowing cost for the government as this will help attract higher foreign flows as many overseas funds are mandated to track global indices. It will also help bring in large passive investments from overseas, as a result of which more domestic capital would be available for industry.

Economic affairs secretary Ajay Seth said, "It is a welcome development showing confidence in the our economy." Chief economic advisor Anantha Nageswaran said JP Morgan has made this decision on their own. It attests to the confidence that financial market participants and financial markets, in general, have on our potential and growth prospects and its macroeconomic and fiscal policies.

The bond inclusion should temper fears of a weakening balance of payments position due to high oil prices. "We see modest upside risks to our current account deficit forecast of USD 40 billion, but the financing of the deficit is unlikely to be major concern. We estimate the balance of payments remains on track to be in a small surplus," Bajoria said.

Nomura analysts see some pre-positioning from global investors.

"On our metrics, we think large investors are already holding 2-3 per cent of their funds in G-Secs or India risk. In 2023 so far, offshore investors net bought USD 3-4 billion of India bonds," Nomura said.