Indian Government Bonds Get Big Boost from JP Morgan Inclusion

Foreign Portfolio Investors (FPIs) are showing strong interest in Indian government bonds following their inclusion in JP Morgan’s index. A report by the State Bank of India (SBI) highlights a significant increase in FPI holdings and predicts further investments.

Key Highlights

Since June 2024, FPI holdings have increased by Rs 16,990 crore, and since the announcement in October 2023, by Rs 95,687 crore. The SBI report anticipates around USD 2 billion in investments over the next 9 months.

This influx is expected to boost demand for government papers, leading to lower yields and a greater impact on short-end yields. Currently, 38 securities under FAR are eligible for inclusion in the JP Morgan Index, with significant headroom available for further investments.

Market Impact

The substantial foreign investment will enhance the depth of the government bond market and support system liquidity. FPI inflows will also supplement the Balance of Payments surplus and add to forex reserves, though no major change is expected in the rupee-dollar exchange rate.

For FY25, the current account deficit is expected at USD 36 billion, with exports of goods at around USD 455 billion and imports at USD 708 billion. Services exports are expected to grow to USD 171 billion. Net FDI is expected to recover to around USD 30 billion, and FII inflows are expected to be around USD 25 billion.

Liquidity and Risks

The report notes a recent cash crunch in the market but expects this to ease with increased liquidity. However, it cautions that global events could still impact the Indian financial system’s stability.

The Reserve Bank of India (RBI) is actively managing liquidity through various operations. The inclusion of Indian government bonds in JP Morgan’s Emerging Market index is estimated to bring USD 20-25 billion in inflows, with USD 10 billion already attracted since the announcement.