Govt bonds in JP Morgan’s bond index could also support Indian currency

JP Morgan’s decision to include bonds of the Indian government in its emerging markets government bond index is expected to have significant benefits for the economy and the Indian currency might be one of them, said experts. According to Deepak Agrawal, chief investment officer of Kotak Mahindra AMC, inflow of investments might help the rupee that has demonstrated some weakness against the dollar in recent months.
“For rupee, I think we are very well placed. The bond inclusion news will play out in the market. We could see some buying in the anticipation of inclusion. So 20% of the next year’s inflows will come in the next 4-5 months, which should also help the rupee be in the band of 82.50 to 84,” Agrawal told a news portal.
JP Morgan, the largest investment bank in the US, announced that it would Indian bonds would be incorporated in the Government Bond Index-Emerging Markets. Among the multiple benefits it could have one is the possible reduction in the cost of borrowing by the government and improvement in the country’s credit rating and support for the Indian rupee and bond markets.
The Indian bond market is estimated at more than 2 lakh crore dollars.
The inflow of relatively lost cost foreign capital in the Indian market – a developing country hungry for capital – has been described as a “major milestone in the country’s financial history” by some other experts.
Agrawal remarked that the GoI bond inclusion could channelise investment of 3,000-3,500 crore dollars next year. “India gets a 10 percent weightage in the JP Morgan Bond index. The size of the JP Morgan Bond index is close to 240 billion dollars. So this will get close to 24 billion dollars inflows next year. The sovereign wealth funds could invest close to 6-7 billion dollars next year. This can also lead to inclusion of Indian bonds into the Bloomberg Global Aggregate Bond index which can also result in 10 billion dollars inflow. So next year we could see close to 30 to 35 billion dollars inflow. This is a very big positive,” Agrawal said.
The INR is suffering a 3-4% depreciation yearly. The inflow can help in this regard too, thinks Agrawal.
“The expected 30 billion dollar inflow next year is substantial and it will add a lot of forex reserves and will give flexibility to RBI to manage volatility in currency very well. Therefore yes, the foreign investors’ expectation of rupee depreciation can be reduced post the inclusion in the bond index”, he said.
The Kotak Mahindra AMC CIO interpreted the absence of a spike in bond yields in India to the fact that the Indian scenario has already factored in the inclusion of the bonds in the index. It prevented a rise in bind yields, especially when compared to the US market.
“Over the course of last 3 weeks, we have seen US bond yields spiking by close to 30 basis points from 4.20 to 4.5 percent and at the same time we have seen brent prices spiking from 87-88 dollar per barrel to 95 dollar per barrel. But our bond yields were more or less trading in the bandwidth of 7.15 to 7.20, so market was expecting inclusion into the bond index which prevented the spike in bond yields in spite of spike in global bond yields.” Agrawal added.
Some experts have said that the inflow of foreign funds could be channelised towards infrastructure projects such as roads, bridges, schools and hospitals.