India's recent inclusion in key global bond indexes has triggered a significant influx of cash, transforming its financial markets. This move, long anticipated, marks a pivotal shift for a country that has traditionally sought to protect itself from volatile international capital flows.
Since the landmark announcement by JPMorgan Chase & Co. in September, foreign investors have infused approximately 780 billion rupees ($9.4 billion) into eligible sovereign bonds. This surge in investment is propelling India up the ownership ranks, with corporate bonds outshining their counterparts, foreign exchange reserves reaching new heights, and the rupee maintaining its ground against a strengthening dollar.
The inflow of funds has notably enhanced the performance of Indian Fully Accessible Route (FAR) bonds, which are set to join the indexes. These bonds have yielded a 2.76% return in dollar terms this year, outperforming both a global emerging sovereign debt index and a benchmark for emerging Asian corporate and sovereign notes. This makes them one of the standout performers in local currency emerging market government debt for 2024.
Experts predict that the inclusion of India in the index will significantly boost foreign investor participation. Chidu Narayanan, head of macro strategy Asia-Pacific at Wells Fargo & Co., anticipates inflows of around $25 billion for Indian bonds by mid-next year, which should bolster the rupee.
The anticipation of the June index change has led to early investments, with more expected as the inclusion process begins and India's weight in the JPMorgan index reaches its full 10% by year-end. This has prompted the Reserve Bank of India to intervene by purchasing incoming dollar flows, raising its foreign reserves to a record $642.5 billion to stabilize the rupee.
Corporate bonds have also benefited from the government debt flows, with yields on top-rated 10-year notes falling about 30 basis points since the index announcement. Additionally, Bloomberg Index Services Ltd. plans to include some Indian bonds in its emerging market local currency index starting next year.
