Global investments in Indian government bonds firm, attributable to JPMorgan index inclusion

Overseas investments into India's sovereign bonds (or G-Secs) were firm last week with an inflow of USD 403 million, soon after the government bonds were officially added to the JPMorgan Chase & Co's benchmark emerging-market index -- Government Bond Index-Emerging Markets (GBI-EM).

In a significant development that could pull in foreign funds into India's debt market, JPMorgan Chase & Co added Indian government bonds to its benchmark emerging-market index starting June 28.

Inflows into the so-called fully accessible route (FAR) bonds by foreign portfolio investors have been to the tune of almost USD 11 billion since the inclusion announcement was made in September 2023, said global investment bank company Morgan Stanley in a report on Monday.

Net inflows of money into India's debt markets have been positive in all but one month in 2024, data showed.

"The bond market saw foreign inflows in six out of the seven months so far in 2024, while equity flows are more mixed. Cumulative inflows to the bond market in 2024 are the strongest in recent years," the Morgan Stanley report titled 'India Fixed Income Strategy', said.

One week after India's sovereign debt market secured a 1 per cent weight in JPMorgan's GBI-EM index, inflows into FAR bonds stayed consistent. Officially, 29 FAR government bonds were included in the suite of global bond indices for emerging markets.

This inclusion, according to Morgan Stanley, holds significant implications for foreign interest and participation in the Indian bond markets.

Foreign investors continue to increase their purchase of G-Secs in 2024. FPIs added almost USD 7.1 billion in FAR bonds in 2024. As a result, foreign ownership of G-Secs has increased to 2.6 per cent.

On G-Secs demand, Morgan Stanley notes that local banks hold 40 per cent of G-Secs. Insurance companies and the RBI hold 28 per cent and 13 per cent, respectively.

"We expect the G-Secs supply pipeline to remain robust, supported by the government's aim to strategically consolidate debt through calendar-driven, auction-based switch operations and the re-issuance of securities to smooth the redemption profile and enhance liquidity in the G-Sec market," Morgan Stanley added.

The inclusion of the index followed the Indian government's substantive market reforms for aiding foreign portfolio investments, the American multinational investment bank JP Morgan had said last year during the announcement.

The inclusion of Indian government bonds in the JPMorgan Government Bond Index-Emerging Markets index could be seen as yet another sign of its growing appeal to global investors as it continues to remain one of the fastest-growing major economies.

This development holds significance particularly as various global manufacturing behemoths are looking at India for investments, as part of their diversification strategy in a post-pandemic world order.

JP Morgan had said India is expected to have a maximum 10 per cent weightage in its Government Bond Index-Emerging Markets. "Inclusion of the IGBs will be staggered over a 10-month period starting June 28, 2024, through March 31, 2025 (i.e., inclusion of 1 per cent weight per month)," JP Morgan had added then.

Foreign investors are already making a beeline to place their bets in India's equity markets. Foreign portfolio investors have been net buyers in Indian stock markets, on and off.