Source – The Economic Times
India is poised for substantial foreign investment in its rupee-denominated government debt market, as state bonds debut on JPMorgan’s emerging market index. This historic inclusion marks the first time Indian government bonds have been featured in a global index.
The influx of Foreign Investments
Over the past nine months, India has experienced around $10 billion in foreign inflows into its bond market since the announcement of this inclusion, according to Puneet Pal, head of fixed income at PGIM India Mutual Fund. This development was shared on CNBC’s “Street Signs Asia.” JPMorgan announced last September that the inclusion of Indian bonds in its Government Bond Index-Emerging Markets would be staggered over 10 months, starting with a 1% weight in June and reaching a maximum of 10% by April next year.
Positive Market Impact
Deepak Agrawal, chief investment officer of debt at Kotak Mutual Fund, told CNBC earlier this year that the inclusion is expected to generate stable flows of around $25 to $30 billion over the next 12 to 18 months following the rebalancing period starting in June 2024. Pal echoed these sentiments, stating that the inclusion of Indian government bonds will have a positive impact on the bond markets in the medium- to long term.
“We anticipate yields drifting lower, especially at the longer end of the curve over the next year, supported by strong underlying macroeconomic fundamentals,” Pal noted.
Indian Government Bonds Join JPMorgan’s Emerging Markets Global Bond Index
Strong Macroeconomic Fundamentals
Pal emphasized India’s robust and stable macroeconomic fundamentals, with headline inflation within the Reserve Bank of India’s target range. India’s inflation rate for May was 4.75%, marking the fifth consecutive month of decline and its lowest rate since May 2023. The RBI targets an inflation rate of 4%, with an upper and lower tolerance limit of 6% and 2%, respectively. Pal forecasts the rate to be 4.5% for India’s financial year ending March 2025.
Additional Economic Strengths
Other positive factors include a current account surplus in the first quarter of 2024, the stability of the Indian rupee, and a lower fiscal deficit. “The macroeconomic situation and fundamentals are looking very good, which is leading to these inflows into the Indian bond markets and a positive outlook for the Indian markets,” Pal stated.
Conclusion
The inclusion of Indian government bonds in JPMorgan’s emerging market index signifies a significant milestone for India’s financial markets, promising substantial foreign investment and reinforcing the country’s strong economic position. This development is expected to have a lasting positive impact on India’s bond market and broader economy.
