Proxy debt plays may slow as JPM index inclusion progresses
Analysts predict the Centre will maintain or reduce the fiscal deficit target to 5% of GDP in the upcoming budget, as foreign investment in Indian government bonds surges post JP Morgan index inclusion.
As 's weight in the Emerging Market bond increases, investors' preference for proxy instruments that provide exposure to Indian is likely to reduce and be replaced by more direct in bonds, the US bank's overseas clients have said."JP Morgan had a client call on Monday, which included overseas investors. One of the points brought up was that as India's weight heads towards the 5% mark, the preference for SSA (sovereign, supranational and agency) bonds will fall, and investment in government bonds will increase to prevent tracking errors," a person directly aware of the client call told ET on condition of anonymity.
An email sent to JP Morgan seeking comment on the matter did not receive a response by press time Wednesday.
Indian bonds debuted in JP Morgan's GBI-EM global index suite on June 28, with the country expected to reach a maximum weight of 10% in the GBI-EM Global Diversified Index over a 10-month period. Assuming an index-neutral position, JP Morgan's analysts expect foreign investment worth $20-25 billion to flow to the Indian government bond market from inclusion.
In the three working days since June 28, investment by foreign investors in index-eligible fully accessible Indian government bonds has increased by ₹2,461.62 crore, or around $294 million. However, since September 22, 2023, the day that JP Morgan announced India's inclusion in its EM index, foreign investment in index-eligible bonds has risen by around $11 billion.
ETMarkets.comParticipants in the client call pointed out that in China, too, when index inclusion commenced a few years ago, overseas flows became steadier once the country's weightage on the index crossed the 5% mark.
After JP Morgan made the long-awaited announcement of India's inclusion in its EM index in September 2023, a certain set of overseas players who had not yet registered as foreign portfolio investors in India, showed strong demand for instruments such as rupee-denominated supranational bonds.
Supranational bonds are issued by entities such as multilateral agencies that have quasi-sovereign characteristics. Investors looking to increase exposure to Indian debt securities - on the view of gains in these instruments amid firm overseas demand - have opted for supranational bonds and skipped local registration and taxation structures.
"Since October 2023, non-residents have poured almost $10 billion into Indian government , and an additional $5 billion through USD-settled, INR-denominated supranational bonds," said Parul Mittal Sinha, head-financial markets, India, at . Speaking to ET last month, Sinha had said the trend of overseas investment flows coming into proxy instruments such as supranational bonds and total return swaps would peter off after three to four months.
Analysts on the call also expressed optimism that the Indian government would adhere to fiscal consolidation in the upcoming full union budget. "Broadly, the expectation in the call was that the Centre will retain the fiscal deficit target at 5.1% of GDP with a possibility of it being reduced to 4.9% or 5%," a second person aware of the development said.
Source: Stocks-Markets-Economic Times
