Indian Bond Market Could See $40-50 Billion Inflows

Indian government bond inclusion in both the JPMorgan and Bloomberg emerging market indices would attract foreign inflows worth $40–50 billion annually, according to analysts.

Currently, foreign investors' holding in government securities stands at 4.5% of the total outstanding, much less than countries like China, Indonesia, and Malaysia.

Historically, such inclusions have led to increased investor interest and inflows, according to Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP. “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.”

This increase is already visible in some of the bond series, with FPIs already holding nearly 20% of the total issuance. According to the data from the Clearing Corporation of India, in the 7.37% G-sec maturing in 2028 and the 7.32% G-sec maturing in 2030, FPIs own a record level of 20.77% and 15.91%, respectively, of total outstanding.

Foreign inflows in Indian debt stand at Rs 45,572 crore so far this year, with Rs 19,837 crore in January and Rs 22,419 crore in February, according to the data from the National Securities Depository Ltd. February saw the highest monthly inflow in over seven years; the previous highest was seen in June 2017 at Rs 25,685 crore. 

Since the announcement of Indian government bonds in the JPMorgan Emerging-Market Index in September last year, the debt market has seen an inflow of over Rs 86,054 crore. 

The development does opens doors for India to enter the global bond index, according to Ritesh Bhansali, director at Mecklai Financial Services Pvt.

But while the inclusion may contribute to positive sentiments, it is not expected to be a substantial "game-changer" in the immediate context, he said.

While these may be seen as huge figures in absolute terms, FPI ownership in the Indian government is among the least.

Foreign ownership of the bond market in China, Indonesia, and Malaysia stands at 8%, 16%, and 36%, respectively, according to the data from an HSBC report. Even with incremental index flows of about $50 billion, total FPI ownership of Indian government debt will be around 5%, the report said.

This current ownership is very modest compared to the country’s economic stance, and this is largely attributable to less familiarity, operational and access issues, and FPI limits in the past, HSBC said. “If investors find the attributes favourable, we believe there is potential for strategic inflows as seen in other markets post-inclusion.”  

Despite yield compression in recent years, Indian debt securities continue to offer relatively attractive yields compared to other developed markets, making them appealing to global investors seeking higher returns, Srinivasan said. 

India’s rupee climbed to a six-month high, making it Asia’s top-performing currency, as local bonds continue to attract foreign inflows ahead of the country’s inclusion into global debt indexes.

The Indian economy has seen $10 billion inflows starting October 2023, after JPMorgan announced the inclusion of Indian government bonds in September 2023. This influx is noteworthy, considering that the actual inclusion is scheduled for June 2024, said Pranjul Bhandari, chief India and Indonesia economist, HSBC.

Analysts expects the inclusion in the Bloomberg index will bring an annual foreign inflows of around $5-10 billion.

The consecutive series of inclusions is anticipated to work like magic in the bond market in the coming years, she said. "It is expected that the economy will receive even more funds once the inclusion becomes effective in June after the actual inclusion."

The development suggests that the Indian rupee is well-funded, as significant inflows contribute to a robust balance of payments, according to Bhandari.

While the last year witnessed flows primarily from the equity market, FY25 is expected to see substantial inflows from the bond market, followed by foreign direct investment inflows from fiscal 2026 onwards, she said.

Retail investors should be interested as it is a great opportunity to make money, according to Anil Kumar Bhansali, 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.”

As an indirect measure of retail participation, the number of accounts opened and total primary market subscriptions in the Reserve Bank of India’s Retail Direct Scheme have seen a huge increase. This scheme includes investments in government-dated securities, Treasury bills, state development loans and sovereign gold bonds.

The total number of accounts opened has seen a year-on-year jump of 55% to 1,16,575 as of March 4. Total primary market subscriptions have also surged by 148% to Rs 4,040 crore. 

Generally, retail investors tend to participate less in G-Secs compared to institutional investors, Srinivasan said. They show more investment interest in Treasury bills and short-term government bonds as they offer attractive returns compared to bank fixed deposits, he said. “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.”