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On June 28, 2024, the Indian Bond Market was included in the JP Morgan Government Bond Index – Emerging Market. This inclusion, announced in September 2023, marks a significant milestone as Indian Government Bonds will be a part of the index until March 2025.
Over the next 9 months, from June 2024 to March 2025, the weight of Indian Bonds in the index will gradually increase by 1% each month.
The anticipated 10% weightage for Indian Government Bonds in the JP Morgan Bond Index - Emerging Market could potentially result in substantial inflows, estimated at $21 billion (approximately Rs.1.7 trillion) by March 31, 2025. This inclusion has prompted various global funds to increase their holdings in longer-term maturity bonds, particularly in the 6 to 10-year segment.
On the other hand, there has been a consistent decrease in the holdings of short-term securities since the announcement. This strategic shift reflects investor confidence in the stability and growth prospects of the Indian Bond Market on the global stage.
How will this impact the debt fund investors. Let us find out:
Devang Shah, Head Fixed Income, Axis Mutual Fund believes that with the combination of JPMorgan's inclusion and strong macro, there is a high possibility that benchmark yields would move closer to 6.70% levels and there has already been around 35-40 bps rally from the peak. He said “About 50-60% of inflows expected because of the addition to the JP Morgan index are priced in and we will see some more rally in yields until the actual flows come in. A balance of 40% of the rally in yields will happen in the next two quarters and investors should stay invested for a long duration. However, the yields will not go below 6.5%, as there needs to be more triggers like additions to Bloomberg indices or Global growth shock for more rally,” he added.
In a note, Mirae Asset Mutual Fund said that in the past, any country which was included in the index recorded robust flows. “As passive flows pick up over the next nine months, the overall curve is expected to drift lower given supportive domestic macroeconomic backdrop. Also, given that the prevailing policy rates represent a peak for the current cycle with expectations of a rate cut in the current financial year, markets remain supportive of bull steepening of the yield curve.”
The fund house recommends short term and low duration categories. It said, these two categories could make a good case of investment due to variegated maturity profile. Further, as when bull steepening (short term interest rates fall faster than long term rates, resulting in a higher spread between the two) takes place these categories could remain attractive.
Jalpan Shah, Head Fixed Income, Trust Mutual Fund said, “The emergence of India as the fastest-growing major economy, a stable government, low and stable inflation, low currency volatility and fiscal discipline makes a compelling argument for Foreign Institutional Investors (FII’s) to invest in Indian government bonds. This inclusion is likely to attract monthly inflows from FIIs of around USD 2 billion every month for the next year resulting in an aggregate of around USD 25 billion over the next year. Since the announcement of this inclusion in September 2023, we have already witnessed FII buying of over USD10 billion in Indian Government bonds. FPIs currently hold 2.4% of the outstanding government securities and this is likely to increase to around 5% over the next 12-18 months as Indian government bonds find inclusion in other global bond indices. This additional demand from FII’s is likely to constitute around 20% of the net government securities supply for this financial year, he added.”
