Foreign investors have shown increasing interest in India's high-yielding government bonds that are eligible for the country's index, with overseas buying crossing $2 billion this year. This trend coincides with a survey that indicates a growing preference among global investors for including Indian debt in JPMorgan Chase & Co.'s benchmark emerging markets index.
According to Bloomberg, these bonds, known as Fully Accessible Route (FAR) bonds, have seen net buying every month this year, with foreign investors purchasing 172.5 billion rupees ($2.1 billion) worth of these bonds. This buying has already exceeded the total purchases made in 2022, which amounted to 159 billion rupees.
The increased foreign investment in India's government bonds coincides with the country's central bank unexpectedly pausing its tightening cycle this month. Bond investors are now betting that interest rates in India, which is Asia's third-largest economy, have likely peaked.
This positive sentiment is expected to receive a boost from the JP Morgan survey, which shows growing support for adding Indian government bonds designated under FAR in JPMorgan's most widely-tracked gauge for emerging market government debt.
According to the survey, support for adding Indian FAR-designated government bonds to JPMorgan's benchmark index rose to 60 percent in March, up from 50 percent the previous year. This suggests that more global investors are recognising the potential of Indian government bonds as an attractive investment opportunity. Analysts, including Gloria Kim, the Managing Director and Global Head for Index Research at JP Morgan, noted in a recent report that this trend is likely to further support the positive sentiment surrounding India's government bonds.
"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.
In March, FTSE Russell announced that it would keep India on watch for its emerging markets government bond index, which is another indication of the growing interest in Indian government bonds among global investors.
India's bond market is one of the largest in the emerging world that is not yet included in global indexes. However, New Delhi has been hesitant to make tax changes that would facilitate the settlement of these securities on global platforms like Euroclear.
Local authorities are also cautious about the inflow of hot money into government securities, especially given the country's high public debt and partially convertible currency. As a result, the Indian government has been slow to make regulatory changes that would attract foreign investors to its bond market.
The JP Morgan survey also revealed that some investors were opposed to India's inclusion in the emerging markets government bond index. These investors cited several obstacles that would need to be addressed before they would consider investing in Indian government bonds. These obstacles include margin requirements for trading, barriers to moving money out of the country after selling bonds, and the lengthy process required to register for an onshore account.
Taxes were also mentioned as a key hurdle by 42 percent of investors, although this was lower than the number of investors citing other obstacles.
These findings suggest that there are still significant challenges that need to be addressed in order to fully integrate India's bond market into the global fixed income market.
Naveen Singh, head of trading at ICICI Securities Primary Dealership Ltd. in Mumbai said, "Investors’ response is certainly positive as India is one of the high yielder economies with a stable currency."
"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," Singh added.
The survey also showed that 25 percent of respondents indicated that they would support India's inclusion in the emerging markets government bond index starting from January 2024, while 20 percent were in favor of India's inclusion from June 2024. Only 15 percent of investors said they would need minimal lead time to start investing in Indian government bonds.
Investors also suggested that a phased rebalance would help overcome the remaining investment hurdles. This would involve a gradual increase in India's weight in the index over time, which would allow investors to adjust their portfolios accordingly.
