Indian government securities have seen inflows of $10.4 billion since the index inclusion announcement in September 2023
Anjali Kumari Mumbai
A large part of inflows via JP Morgan bond index inclusion has yet to materialise and this is likely to be led by benchmark issues, said HSBC in a report on Monday. The report said that benchmark bonds continue to have low foreign investments.
In September 2023, JP Morgan had announced that it will include government papers, issued by the Reserve Bank of India (RBI) under the Fully Accessible Route (FAR), in its widely tracked GBI-EM. The inclusion process will start on June 28 and will be phased over a 10-month period, with 1 per cent weight included each month until March 31, 2025. Indian bonds will have 10 per cent weight, similar to China.
Indian government securities have seen inflows of $10.4 billion since the index inclusion announcement in September 2023.
“India government bonds have already seen inflows of $10.4 billion since the inclusion announcement on September 21, 2023. This poses a question whether a large part of indexation-related inflows have materialised. We note that index-eligible bonds have recorded inflows of only $8.3 billion and four off-the-run issues alone have received 66 per cent of the foreign investments. In our view, a large part of inflows has yet to materialise and this is likely to be led by benchmark issues,” the report said.
The report further said that 5-year, 7-year, 10-year and 30-year benchmarks alone could closely track the return performance of the 28 bonds eligible for inclusion given the low foreign positioning, their availability through auctions, and the relative increase in their index weight versus other bonds.
Out of 38 FAR securities, only 28 bonds with the outstanding amount of $413 billion are eligible for inclusion.
According to the report, Thailand, Poland, and the Czech Republic are expected to see reductions in their weights in the JP Morgan Emerging Market Bond Index over the next 10 months. This adjustment will make room for India’s 10 per cent weight in the index. However, the impact of this reweighting on other emerging market peers will be minimal, as India’s inclusion will be phased in over a 10-month period.
“To accommodate India’s 10 per cent weight in the index, a reweighting will occur for other EM peers in the index, which will see a reduction in their weights. In our view, the reweighting impact will not be significant, given that India’s inclusion will be phased over a 10-month period. We also find that reweighting is likely to be less meaningful for EM high yielders, given their market size, while the largest reduction in weights at the end of the 10-month period is likely to occur for Thailand, Poland, and the Czech Republic,” the report said.
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