Foreign inflows into Indian bonds spike to 6-year high in 2023 before index inclusion

By Dharamraj Dhutia

MUMBAI (Reuters) – Foreign investment in Indian government bonds saw a remarkable jump in the last three months of 2023, with JPMorgan’s decision to add the debt to its indexes boosting inflows to a six-year high.

Overseas investors net bought government bonds worth 350 billion rupees ($4.2 billion) in October-December, pushing the full-year tally to 598 billion rupees, the highest since 2017, clearing house data showed.

Fund managers expect more inflows in the New Year.

“We are positive on India into 2024 and also expect inflows into the local currency asset class,” Jean-Charles Sambor, Head Emerging Markets, Fixed Income at BNP Paribas Asset Management, said.

India’s inflation should be contained and fiscal risks well-controlled, and this, along with rate cuts from the Federal Reserve, could push the 10-year benchmark bond yield to below 7%, Sambor said.

In September, JPMorgan announced it will include some Indian bonds in the Government Bond Index-Emerging Markets and its index suite from June. This should lead to incremental inflows of around $25 billion into bonds, according to analysts.

India’s 10-year benchmark bond yield was trading at 7.20% on Monday, after falling 15 basis points in 2023. The yield had jumped in the previous year as central banks across the world tightened monetary policy, hurting demand for emerging market assets.

Now, the Fed has indicated it is ready to cut interest rates in 2024 and many expect the Reserve Bank of India (RBI) to follow suit.

“Foreign inflows in bonds should continue due to (index) inclusion and could see a boost if the Federal Reserve cuts rates aggressively, as that will enhance the yield differentials,” Andrew Holland, CEO, Avendus Capital Public Markets Alternate¬†Strategies, said.

Holland expects the Fed to cut rates by 100 basis points-150 basis points in 2024 and the RBI to lower rates by at least 50 basis points.

The U.S. 10-year bond yield has fallen to around 3.85% on rate cut hopes, widening the spread with its Indian peer to 335 basis points from around 240 bps in late October.

Indian bonds under the so-called fully accessible route received the bulk of flows late last year, with foreign holdings in them more than doubling from a year earlier to 1.3 trillion rupees, clearing house data showed.

($1 = 83.1600 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Mrigank Dhaniwala)