The average monthly debt investments made by Foreign Portfolio Investors (FPIs) have seen a remarkable increase since September 2023. This surge in debt investments has come on the back of 2 announcements, among other factors: (a) Confirmed Inclusion of Indian Government’s Fully Accessible Route^ (FAR) G-Sec bonds in the JP Morgan Government Bond Index (GBI)-EM Global Diversified (GD) Index and GBI-EM Global index, starting June 28, 2024, and (b) Potential inclusion of the FAR G-Sec bonds in the Bloomberg Emerging Market (EM) Local Currency Index starting September 2024. Both these inclusions bode well for FPI inflow in the Indian fixed income markets, and align well with the Indian Government’s vision to establish the nation as a global economic powerhouse.
As per the JP Morgan (JPM) Global Index Research, India is expected to reach the maximum weight of 10% in the JPM GBI-EM GD Index and 8.7% of GBI-EM Global Index. Currently, 32 Indian Government Bonds (IGBs) with a combined notional value of ₹31.8 trillion (as on February 12, 2024) are index eligible. The 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% weight per month).
As per Bloomberg, the inclusion of India FAR bonds in the Bloomberg FPI EM Local Currency Indices is to be phased in over a 5-month period starting in September 2024. As a result, the Indian FAR bonds will be included in the Bloomberg EM Local Currency indices with an initial weight of 20% of their full market value in September 2024. The weight of FAR bonds will be increased in increments of 20% of their full market value every month over the 5-month period ending in January 2025, at which point they will be weighted at their full market value (100%) in the indices.
As per a report by UBS Global Strategy, with JPM GBI-EM’s benchmarked AUM of ~$236 billion, India could potentially record about $25 billion of foreign portfolio flows, phased over the 10-month period starting June 2024. Furthermore, if the IGBs are included in Bloomberg indices, there could be additional flows linked to these indices.
FPIs have been positioning for the potential inclusion of G-Sec bonds in the global bond indices by purchasing the FAR bonds, with ~₹67,680 crore flowing in since September 2023 (announcement of inclusion in JPM GBI-EM Global Series). All things remaining equal, this rise in investments would mean an increase in the strength of Rupee. While concerns around the volatility of yield of G-Sec bonds remain as a result of increased inflows, it is not expected to rise significantly, thus potentially keeping India relatively insulated to geopolitical events.
It can be observed from Chart 2 that FPI hold for just 1.6% of the total outstanding stock of the Government Securities (September 2023). With the index inclusions going through, the ownership of FAR bonds will witness a further increase – in addition to the one seen in the above chart, resulting in forex inflows. This would certainly help our balance of payments position, while also acting as a support to the fixed income market in India.
As India continues to open its financial markets to the world, it is positioning itself as an attractive destination for global investors. Such efforts should have positive long-term effects on India’s economic growth and increase its influence on the global financial stage.
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