Indian bonds back in action with inclusion in JP Morgan’s emerging markets bond index

Indian government bonds with a combined nominal value of $330 billion will be included in JPMorgan Chase & Co.'s emerging markets bond index effective 28 June. 

This will make India's bond market the 25th to join the widely tracked index since it was launched nine years ago. 

JPMorgan announced in September that it would include 23 Indian government bonds in its emerging markets bond index. 

Between then and May, foreign portfolio investors’ assets under custody in debt have swelled by ₹84,093 crore, show data from the National Securities Depository Ltd.

Foreign bond investors locked in yields anticipating that the Reserve Bank of India would maintain its high-interest-rate stance leading up to the inclusion of Indian bonds in the JPMorgan index.

Also read | Look who scooped up Indian bonds since the JP Morgan move

“Foreign investors are shifting towards longer-dated Indian bonds,” said Kunal Sodhani, vice president at Shinhan Bank.

“Yields have dipped since the inclusion announcement, with the 10-year bonds easing 20 basis points due to foreign inflows into the debt segment,” he added. “We expect a broader range for the 10-year (government securities) to be 6.85%-7.05%.”

India's debt market has attracted significant inflows from overseas investors this year, totaling around ₹67,000 crore. 

Since September, the Indian debt market has witnessed inflows to the tune of ₹1.1 trillion. This, coupled with the attractive yield differential compared to other emerging markets, has made the Indian rupee a relatively stable performer in the region. 

The JPMorgan Emerging Market Index, with over $200 billion in assets, is expected to passively allocate around $25 billion to Indian bonds over the next 10 months.

Jayesh Mehta, vice chairman and chief executive of DSP Finance, said RBI would have to ensure enough supply of bonds to meet the increasing demand. 

"New foreign buyers are going to come at a time when government borrowing for the fiscal year is expected to be less. We are going to see demand overpowering supply this year and RBI will have to sell bonds if it wants to avoid yields going near the repo rate," said Mehta.

Also read | India’s inclusion in JPMorgan’s bond index needs sober analysis

On the potential impact of the bond inclusion on the rupee, experts said the usual trend of currency depreciation due to India's trade and current account deficits is unlikely to repeat in the near future. 

“The rupee is one of the stable emerging market currencies. Last year's depreciation was only 2%, much lower than the historical average,” said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.

“The Q1 FY24 current account is in surplus. With India included in the Global EM Bond Fund, debt capital flows will increase, further imparting stability to the rupee," he added. "Presently, the rupee's depreciation is not a serious concern.”

The rupee's future trajectory, however, might be influenced by external factors. Jateen Trivedi, VP Research Analyst at LKP Securities, expects the rupee could experience a gradual decline if the dollar index rises above $106 due to geopolitical tensions or prolonged high US interest rates. Conversely, an anticipated interest rate cut by the RBI in September 2024, or soon after, could strengthen the rupee as the dollar weakens towards the $102 zone.