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Eligible INR sovereign bonds will be added to the JPMorgan GBI-EM GD index and other relevant derivative indices starting Friday, with the weightage scheduled to increase by 1% monthly to 10% by March 2025. With India’s inclusion, Asia’s weight will rise to close to 47.6%, equalling China and Indonesia once initiation is complete. Amongst the securities available under the Fully Accessible Route (FAR) window, bonds with a minimum outstanding of above $1bn and at least 2.5y of residual maturity will qualify for purchase, i.e., about 28 securities maturing after Dec26.
Breakdown shows investors’ willingness to take on duration risk, with maturities of over 5Y (especially benchmark and including off-the-run), attracting most interest. Current 2033 and 2028 papers have the highest FPI ownership of 12.2% and 10.8% of outstanding issuance as of June 27. Long duration papers are expected to continue benefiting from incremental flows, given better supply through regular auctions and relatively smaller ownership at present. The overall foreign ownership as % of outstanding INR bonds is likely to increase by nearly three times in the year ahead, from 2.5% at present. Notwithstanding, strong inflows ahead of the inclusion (CYTD $9bn; June witnessed $1.7bn, almost entirely into FAR), monthly inflows are expected to be more gradual but persistent, adding up to incremental $18-20bn over the phase-in period. Bloomberg is also scheduled to add India’s bonds from Jan 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 vols, a supportive macro backdrop, strong defences against market volatility (record high reserves stock) and ongoing fiscal consolidation are key factors that make IGBs attractive for investors. In the near-term, we don’t expect these inflows to stoke material swings in the rupee or liquidity, courtesy the central bank’s active presence to minimise volatility. Belly to long-duration bond yields is expected to ease, with a significant downmove to meet onshore profit-bookers.
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