Foreign buying of India’s index-eligible, high-yielding government bonds crossed $2 billion this year, coinciding with a survey that showed more global investors favoring debt from the South Asian nation be added to JPMorgan Chase & Co.’s benchmark emerging markets index.
(Bloomberg) — Foreign buying of India’s index-eligible, high-yielding government bonds crossed $2 billion this year, coinciding with a survey that showed more global investors favoring debt from the South Asian nation be added to JPMorgan Chase & Co.’s benchmark emerging markets index.
Overseas investors have bought 172.5 billion rupees ($2.1 billion) of so-called Fully Accessible Route (FAR) bonds, with them being net buyers in every month so far this year. The buying eclipsed the purchases in the whole of 2022 which was at 159 billion rupees.
The increased exposure by foreigners comes as India’s central bank unexpectedly paused on its tightening cycle this month with bond investors betting that interest rates in Asia’s third-largest economy have probably peaked.
That positive sentiment is likely to get a fillip from the JP Morgan survey. Support for adding Indian government bonds designated under FAR in JPMorgan’s most widely-tracked gauge for emerging market government debt rose to 60% in the survey carried out in March. That was up from 50% the previous year, analysts including Gloria Kim, managing director and global head for index research at the firm, wrote in a note last week.
“Survey respondents expressed a preference for first half 2024 at the earliest for index inclusion with a ten-month phase-in period,” the analysts wrote. The survey makes no immediate change to India’s status and the country remains on watch for index inclusion. The result of the consultations for a possible inclusion are due in the third quarter of 2023, it said.
JPMorgan’s survey follows FTSE Russell’s decision in March to keep India on watch for its emerging markets government bond index.
India’s bond market is amongst the largest in the emerging world that’s not already included in global indexes and New Delhi has shown reluctance to make tax changes that would help securities settle on global platforms like Euroclear. Local authorities are wary about hot money flows into government securities especially given high public debt and a currency that is only partially convertible.
“The process for inclusion is ongoing but will take longer than this year,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management SA, who owns India local debt. “Many large investors have the necessary infrastructure (accounts etc.) but the others will need time to go through the various administrative hoops.”
Read: India Unwilling to Bend for Index Inclusion to Bring in Billions
Obstacles
The survey showed that investors who opposed India’s inclusion cited obstacles like margin requirements for trading, barriers to freely moving money out of the country from bond sales, and the long amount of time required to register for an onshore account. Taxes were also mentioned as a key hurdle by 42% of investors, lower than for other obstacles.
“Investors’ response is certainly positive as India is one of the high yielder economies with a stable currency,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership Ltd. in Mumbai. “Although procedural inefficiencies are keeping them at bay, these structural issues are not getting sort any time soon. The ease of trading in other geographies will thus deprive markets from any near term advantage.”
The survey showed that 25% of respondents would support India’s inclusion starting January 2024, while 20% were in favor from June 2024. Only 15% said they need minimal lead time. Investors also said a phased re-balance will help overcome remaining investment hurdles.
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–With assistance from Ronojoy Mazumdar.
(Adds GAMA comments in 8th paragraph.)
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