Foreign funds are steadily increasing exposure to Indian debt

Illustration: Ajay Mohanty
Foreign funds are steadily increasing exposure to Indian debt amid growing expectations that inclusion of the nation’s bonds into global indices is imminent.


Bond purchases by overseas investors under the uncapped Fully Accessible Route, climbed to Rs 35 billion ($476 million) in August, the highest this year. They’ve bought Rs 32.2 billion of bonds so far this month, set for a fifth straight month of inflows, following outflows from January-April.


Global index provider FTSE Russell, which placed Indian bonds on the watchlist for possible inclusion in its debt index, is set to announce the result of its review September 30. JPMorgan Chase and Co. typically reviews its index this month. Morgan Stanley estimates India’s inclusion in global bond indexes will lure $40 billion of inflows in the next two years.


Indian authorities have been working toward making the nation’s bonds eligible for index inclusion to help fund infrastructure projects in Asia’s third-largest economy. Bloomberg said in 2019 that it would work with Indian authorities to help the nation gain access to global indexes.


Reserve Bank of India Governor Shaktikanta Das said earlier this month that policy makers are making efforts to enable international settlement of transactions in government bonds, a move that would greatly increase the attractiveness of Indian debt and help in inclusion in global indexes. India has also been trying to sort out taxation issues with Euroclear to facilitate listing of Indian debt.

Most of the spadework is done and the nation’s bonds are expected to be included in the indexes by March, Sanjeev Sanyal, principal adviser to the finance ministry said Friday. The yield on 10-year bond fell three basis points to 6.14 per cent on Monday, taking the monthly drop to eight basis points.


“We expect foreign-investor demand to improve, albeit in a measured way, drawing on falling hedging costs and prospects for index inclusion,” said Ashish Agrawal, rates strategist at Barclays in Singapore.


Following China


India’s inclusion would make it the last major emerging-market nation to join the global bond indices after China, according to Morgan Stanley. China’s bonds are set to be added to FTSE Russell’s flagship World Government Bond Index in October in phases over three years. Analysts expect the move to prompt foreigners to pour $105 billion-$156 billion into China’s debt.


Prime Minister Narendra Modi’s administration last year opened up a wide swath of its sovereign bond market to overseas investors, its biggest step yet to secure access to global indexes. Still, the foreign investment in rupee bonds has been tepid due to elevated inflation and the government’s near-record borrowing plan.


“Foreign ownership of Indian government bonds has been declining, but 2022 would be the turning point that could bring an acceleration of bond inflows,” Morgan Stanley strategists led by Min Dai, wrote in a note. The inclusion in global bond indexes should bring $18.5 billion in inflows every year over the next decade, compared to just $36.4 billion in the last ten years, the analysts wrote.


While expectations for index inclusion in this review are low, some including Morgan Stanley forecast it could happen as early as the first quarter of next year.


Goldman Sachs Group Inc.’s timeline is less optimistic. It sees India’s inclusion in JPMorgan’s GBI-EM Global Diversified Index likely by end-2022 or early 2023, and in the Bloomberg Global Aggregate Index by end-2022 or 2023. India does not meet the country rating criteria for the FTSE World Government Bond Index, so it is not eligible at this juncture, it said.


“We view Indian bonds favorably given the relatively higher nominal yields, strong external balances and early indications of improving fiscal outlook,” said Prashant Singh, senior portfolio manager for emerging markets debt at Neuberger Berman in Singapore. “However, from a near term perspective, we are positioned neutral as a rebound in economic activity will likely prompt some rollback of the current ultra-accommodative stance, which can push yields higher.”         

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