Foreign investors buy Indian bonds for inclusion in global indices

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MUMBAI — Foreign investors have stepped up purchases in a handful of Indian government bonds that have no limits on foreign investment ahead of a planned inclusion of Indian debt in global bond indices, analysts said.

The central bank removed foreign investment caps for a number of securities under the “fully accessible route” (FAR) in April 2020 to help meet a key requirement of index providers.

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“As for inclusion, bonds under FAR will be part of the index as there are no restrictions in this segment,” said Ashish Agarwal, Asia Head of Currency Research and Macro Strategy. emerging markets at Barclays.

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“If they would be included, we can expect a premium to form between FAR bonds and other Indian government bonds,” Agarwal said.

Foreign investors bought bonds worth nearly 66 billion Indian rupees ($834.60 million) in this category in the six weeks to September 9, even as they sold 18 billion rupees other public securities on a net basis.

Almost half of the purchases were in the five-year 7.38% 2027 bond and the old benchmark 6.10% 2031 bond, which saw inflows of Rs 16 billion and Rs 15 billion, respectively, during this period.

The buzz around an inclusion of Indian bonds in global indices grew after a report in August said JPMorgan was in talks with investors about possible inclusion in its emerging markets index.

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Goldman Sachs said it expects inclusion this year, while Morgan Stanley said earlier this month there was a good chance JPMorgan would announce inclusion soon.

While Goldman Sachs expects an aggregate inflow of around $30 billion from inclusion in JPMorgan’s Emerging Markets Index, Barclays has estimated around $25 billion.

Barclays also expects another $8 billion to $20 billion from possible inclusion in the Bloomberg Global Aggregate bond index.

“If Indian bonds are included in the GBI-EM index, we estimate inflows of around $15-20 billion, spread over at least three quarters in FY24 and most of these inflows will go to FAR bonds,” said Rohit Arora, senior FX and rates market strategist at UBS Global Research.

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INDIA VS INDONESIA

Flows into Indian bonds could hurt a market like Indonesia, one of the emerging Asian economies whose government bonds feature in global indices.

“Foreigners are exposed to Indonesian bonds, but they have very little exposure to Indian bonds. So with Indian bonds accounting for up to 10% of the GBI-EM index, the share of other countries will fall,” Barclays’ Agarwal said.

“From a reallocation perspective, there may be a negative impact on other markets and Indonesia is one of them.”

The yield on the Indian benchmark bond is 7.15%, while the Indonesian 10-year bond offers a yield of 7.13%.

“Beyond the one-time flows, we suspect that lower historical volatility in Indian bonds relative to those in Indonesia, due to larger captive flows in the former, could potentially attract relatively more inflows,” said Arora of UBS Global Research.

After the initial realignment of inflows, foreign players will assess macroeconomic fundamentals such as the current account deficit and inflation to guide their long-term moves.

($1 = 79.0800 Indian rupees) (Reporting by Dharamraj Lalit Dhutia; Editing by Saumyadeb Chakrabarty)

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