Foreign Investors Buy Long-Duration Indian Bonds Before JPMorgan Index Inclusion

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Overseas Investors Target Long-Term Indian Government Bonds Ahead of JPMorgan Index Inclusion

Team FS

27/May/2024

Key Points:

Foreign investors are buying long-duration Indian government bonds ahead of JPMorgan's emerging market debt index inclusion.
The 2033 and 2053 bonds are particularly attractive, with significant foreign ownership.
The inclusion is expected to bring around $25 billion in passive inflows, with active fund managers already adjusting their strategies.

Overseas investors are increasingly purchasing long-duration Indian government bonds in anticipation of their upcoming inclusion in JPMorgan’s emerging market debt index. This strategic move is driven by expectations that these securities will attract substantial passive inflows once they are part of the index.

Recent Trends in Foreign Investment

Despite a net sale of 117 billion rupees ($1.41 billion) in government bonds over the last ten weeks, foreign investors have shown a keen interest in bonds with maturities of 10 years and more. Data from the clearing house reveals that these long-duration bonds have seen consistent inflows. Notably, India’s former benchmark, the 7.18% 2033 bond, has led these inflows, closely followed by the 7.30% 2053 bond.

Focus on Long-Duration Bonds

Clement Niel, a portfolio manager for emerging markets local debt at BNP Paribas Asset Management, highlighted that 9-year and above maturity bonds represent 50% of India’s future weight in the index. This significant representation is expected to draw special attention from investors. Niel emphasized, “We expect more flows here as investors ramp up their passive exposure to India.”

Among the bonds under the fully accessible route (which allows unrestricted foreign investments), the 2033 bond has the largest foreign ownership at 12%. The 2053 bond follows, with foreign ownership at 3.6%. These bonds are particularly attractive to foreign investors due to their long maturities and potential for better returns.

Also Read : Indian Stock Market Closes Flat Amid Profit Booking After Record Highs

Strategic Shifts and Market Dynamics

Alongside direct purchases, foreign investors have also been utilizing derivative proxies to gain exposure to Indian bonds. The inclusion of these bonds in the JPMorgan emerging market debt index, effective June 28, is projected to generate around $25 billion in passive inflows. Market estimates suggest that active fund managers have already begun to adjust their portfolios in anticipation of this inclusion.

Until March, overseas investments were primarily focused on shorter-duration bonds. However, fund managers are now shifting their strategies, favoring longer-duration securities. This change is influenced by expectations of index inclusion and a global slowdown in inflation, which is likely to lower long-term interest rates. Niel from BNP Paribas Asset Management stated, “Index inclusion and slowing inflation globally will help push long rates lower in the future.”

Positive Fiscal Outlook

Allianz Global Investors is another key player increasing its exposure to Indian bonds, including the 30-year security set for inclusion in JPMorgan’s index. Giulia Pellegrini, senior portfolio manager for EM fixed income at AllianzGI, noted that the long end of the bond curve is typically influenced by the fiscal outlook. She added, “In India, it is a positive fiscal picture. So, we don’t mind at all having exposure to the long end as well.”

The Indian government aims to reduce its fiscal deficit to 4.5% by March 2026. The recent large dividend from the Reserve Bank of India has mitigated some fiscal risks, further bolstering investor confidence in long-term bonds.

Conclusion

The proactive steps taken by foreign investors to purchase long-duration Indian government bonds reflect a strategic anticipation of significant passive inflows following the inclusion in JPMorgan’s emerging market debt index. This move is underpinned by a positive fiscal outlook for India and the potential benefits of better price discovery and accurate pricing mechanisms. As the inclusion date approaches, the market is likely to see increased activity and strategic adjustments from both passive and active fund managers, positioning Indian government bonds as a key focus in global investment portfolios.

Also Read : NSE to Launch One Paisa Ticket for Stocks Below Rs 250 from June 10

Also Read : Fitch: Larger-than-Expected RBI Dividend Boosts India’s Sovereign Rating Outlook

Also Read : Indian Stock Market Closes Flat Amid Profit Booking After Record Highs

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