With JP Morgan index inclusion a month away, FPIs invest in GoI debt

With just a month left for Indian government bond to be included in the JP Morgan Index, foreign investors have begun putting their money in these bonds. The sudden buying of government bonds also marks a departure from April, when FPIs these institutions were on an overall selling spree, the Business Standard has reported.

While April witnessed a net sale of Rs 11,218 crore, these institutions have registered a net purchase of debt papers of about Rs 7,427 crore in May.

Explaining the change in mood, vice-president of ICICI Securities’ primary dealership, Naveen Singh said, “According to the schedule given by JP Morgan, the weighting will be increased by 1 per cent every month. So, passive investors will have to buy to reduce the tracking error of the index.”

Giving India a big moment to rejoice in, JP Morgan declared in September last year that from June 28 it would begin including government papers, issued by the Reserve Bank of India under the Fully Accessible Route, in its GBI-EM (Government Bond Index-Emerging Markets). The inclusion will be a phased process and take place over 10 months, with a 1% weight stepped up each month till March 31, 2025.

Eventually, Indian bonds will have a 10% weight, the same as that of China.

The JP Morgan index can provide bounty to Indian bonds. This index has about $250 billion of assets tracking it and 10% weight implies about $25 billion inflows can be expected to flow in during the period.

On their part, the FPIs think that yields are expected to sober down during FY24 and it could offer them an opportunity to make money. “They keep doing the rebalancing of their investments in different markets. The bond inclusion was one of the reasons for the FPIs to be attracted to the market,” the treasury head of a private bank told the newspaper.

So far in May, the yield on the benchmark 10-year government bond has fallen by 20 basis points, settling at 7% on May 28. During January-March period this year, FPIs pumped in Rs 54,492 crore into the debt market, which triggered a fall in the yield on the benchmark bond by 14 bps in this time period.

But April recorded a change in the trend after a year of strong inflow from the FPIs. The reason: a rise in US Treasury yields in the midst of rising geopolitical tensions.

During FY24, domestic markets recorded FPI inflows of Rs 3.23 lakh crore, which marked a departure from the outflow of Rs 45,365 crore witnessed in FY23. NSDL data reveal of the total inflows, FPIs injected Rs 1.2 lakh crore – or 37.15% — into debt securities. The amount pumped in FY24 is incidentally the highest amount since FY15.

According to the criteria for inclusion in the JP Morgan index, the debt instruments should have a notional outstanding amount of equivalent of $1 billion and they should be at least 2 years six months away from maturity.