India's bond market has garnered overseas inflows of about Rs 95,000 crore since the announcement of its inclusion in the JPMorgan Emerging Bond Market indices last September. Analysts believe that despite a short-term cooldown, inflow into the market will continue on positive economic fundamentals.
The gilts will be included in the JPMorgan index on June 28, attracting around $25–50 billion in passive and active foreign inflows. Along with this, the bonds will also be included in the Bloomberg Emerging Market Bond Index in January 2025.
Inflows have likely been more than expected, according to Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP. This significant amount indicates strong initial investor enthusiasm, reflecting confidence in India's economic prospects and the attractiveness of its bond market, he said.
So far this year, foreign inflows into Indian debt stand at Rs 53,670 crore. Of this, Rs 40,482 crore of inflows happened between September and December 2023.
After 13 months of consecutive inflows, the domestic debt market saw an outflow of Rs 10,949 crore due to uncertainties about the 2024 Lok Sabha elections.
Will Flows Cool Post Inclusion?
Analysts expect inflows to continue in the long term, but there may be a brief period of wait-and-watch due to potential profit booking.
The planned inflow phasing at 10% per month for 10 months starting in June 2024 aims to provide a steady and manageable integration into the index, Srinivasan said. Several key factors, like economic performance, US Treasury yields, global economic trends, and investor risk appetite, will influence these flows, he said.
However, increased FPI inflow before the start of index inclusion may be accompanied by some selloffs in between for booking profit, Srinivasan said. "While some moderation in inflows might occur after the initial inclusion phase, the overall trend should remain positive if domestic and global conditions align favourably."
The scheduled inclusion of Indian gilts in JPMorgan's Government Bond Index-Emerging Markets this June, alongside inclusion in Bloomberg's Emerging Market Local Currency Indices, is anticipated to bring in $40–50 billion in inflows.
With Indian bonds getting included in these indices one by one, the proportionate share of the fund will get invested in Indian sovereign debt papers, according to Abhijit Roy, chief executive officer, GoldenPi. Global Fund Managers who track the JPMorgan EMBI for their funds, will now have exposure to the Indian sovereign debt market.
India Inflow Won't Replicate China Fadeout
The initial surge of inflows into Chinese bonds fizzled out after it joined the global indices in 2019. This will not be the case, as the macro- and micro-economic environments are different in the two countries.
Yields rose, and the scale of inflows that eventually materialised was just about 10% of the analysts' projections for 2021, according to a Bloomberg report.
The fundamental difference between China's economy and India's economy is the level of safety built into the overall economy, according to Roy. "India's economy is way more resilient, and the chances of such defaults are very rare given the checks and balances."
India's bond market and regulatory environment differ from China and have distinct differences that may lead to a more sustained inflow, Srinivasan said. "India has been working on improving market access and transparency, which can help maintain investor confidence."
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