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Indian Bond Market Likely to Experience $40-50 Billion Influx

Submitted by admin on March 12th, 2024

According to analysts, the Indian Government’s bond infusion in both the Bloomberg and JPMorgan emerging market indices is likely to attract annual foreign capital worth $40-50 billion. Foreign investors’ holding in government securities currently stands at 4.5% of the total outstanding. The figure is more than that in many countries including China, Malaysia, and Indonesia.

Rockford Fincap LLP founder and managing partner Venkatakrishnan Srinivasan thinks these inclusions have historically fostered investors’ increased investment rates and inflows. “The extent of the increase would depend on various factors, including prevailing yields, expectations of rate cuts, investor sentiments, securities to be made available under the FAR route, and the attractiveness of Indian bonds compared to other investment options available to FPIs,” he adds.

The increase is evident in some of the bond series. FPIs are currently holding about 20% of the total issuance. The data from the Clearing Corporation of India suggests the 7.32% G-sec maturing in 2030 and the 7.37% G-sec maturing in 2028. FPIs currently own 15.91% and 20.77% respectively of the total outstanding.

The National Securities Depository Ltd. Claims that foreign cash inflows in Indian debt remain at Rs 45, 572 crore to date this year, with Rs 19, 837 crore and Rs 22, 419 crore in January and February respectively. The highest monthly inflow in more than seven years was registered in February. The previous highest was recorded at Rs 25, 685 crore in June 2017.

The news of Indian Government bonds in the JPMorgan Emerging-Market Index was announced in September last year. Since then, the debt market has experienced a cash influx of more than Rs 86, 054 crore.

Mecklai Financial Services Pvt Ltd director Ritesh Bhansali claims that the development opens doors for India to step into the global bond index. While the inclusion is believed to positively contribute to developing optimistic sentiments, it is highly likely to be a “game-changer” in the recent context, according to him.

The Global Scenario

These are likely to be considered astronomical figures in absolute terms. However, FPI ownership in the Indian government makes it to the list of the “Least”. According to an HSBC report, foreign ownership currently stands at 8%, 16%, and 36% in the bond markets of China, Indonesia, and Malaysia respectively. Even with increased index flows of nearly $50 billion, PFI will own nearly 5% of the Indian Government debt, according to the report.

The current ownership is not certain with respect to the country’s economic stand mainly due to less familiarity, access and operational issues, and PFI restrictions in the past, as per an HSBC report. “If investors find the attributes favorable, we believe there is potential for strategic inflows as seen in other markets post-inclusion.”

Yield compression in recent years has not kept Indian debt securities away from offering attractive yields continuously compared to the markets in other developed countries. The trend has appealed to global investors seeking increased returns, Srinivasan informs.

Higher Inflows: Understanding the Impact

India’s rupee rocketed to a six-month high in value, emerging as the top-performing currency in Asia as local bonds continued to draw foreign inflows before India’s inclusion into the global debt indexes. The Indian economy has experienced $10 billion in inflows starting from October 2023 after an announcement by JPMorgan about the Indian government bonds’ inclusion in September 2023.

According to HSBC’s chief India and Indonesia economist Pranjul Bhandari, it is a remarkable influx, given that the schedule of the actual inclusion is for June 2024. As per analysts’ expectations, the inclusion in the Bloomberg index will lead to annual foreign inflows of nearly $5-10 billion.

Year-to-Date Based Asian Currency Performance

The conservative series of inclusions is expected to perform magically in the bond market in the upcoming years. “It is expected that the economy will receive even more funds once the inclusion becomes effective in June after the actual inclusion,” a source claims. According to Bhandari, the development claims that the Indian currency is well-funded as massive inflows help to build a massive balance of payments.

While inflows happened from the equity market in the last year, FY25 is believed to witness a considerable influx from the bond market, followed by direct foreign investment influxes from FY26 onwards.

Retail Participation

Retail investors should take interest as they could make money by leveraging this golden opportunity, as suggested by Anil Kumar Bhansalli, the head of Treasury and executive director at Finrex Treasury Advisors.

“The most important factor for retailers is that interest rates are going to come down overall. FED, ECB, and BOE are all going to cut and not raise,” he adds.

Though not a direct measure of retail participation, there has been a massive increase in the number of total market subscriptions and the number of accounts created in the RBI’s Retail Direct Scheme. The scheme covers investments in treasury bills, government-dated securities, sovereign gold bonds, and state development loans.

The total number of accounts opened has witnessed an increase to 1, 16,575 (55% jump) as of March 4. The total primary market subscriptions have gone up to Rs 4,040 crore (a 148% jump).

Srinivasan claims that retail investors tend to have less participation in G-Secs concerning institutional investors. They are heavily interested in investing in short-term government bonds and Treasury bills due to their attractive returns concerning bank fixed deposits.

“However, when yields drop, it may reduce the absolute return potential, but G-Secs still offer several advantages, such as safety, better short-term returns, and diversification benefits.”