India set to raise trillions as bonds join JPMorgan index

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India is set to welcome billions of dollars in foreign investment when JPMorgan adds the country’s sovereign debt to its emerging markets index on Friday, a move that some analysts say will make it more vulnerable to volatile money flows. hot.

India’s inclusion marks the first time that bonds from the world’s fastest-growing major economy have been included in a major benchmark and is the latest move to open up a once-closed market. Only in 2020 did India remove foreign ownership restrictions on certain rupee-denominated debts.

The inclusion of 28 government bonds worth more than $400 billion will give India a 10 percent share of the widely followed measure, according to JPMorgan.

According to Goldman Sachs, around $11 billion has been invested in Indian bonds as investors position themselves ahead of their formal inclusion. The bank expects another $30 billion to arrive as bonds are gradually incorporated into the index over the next 10 months, increasing foreign participation from around 2 percent to around 5 percent.

The entry culminates years of negotiations between the Indian government, banks and investors, during which the country eased some burdensome administrative controls and improved the tradability of bonds.

“The sentiment is quite significant,” said Carlos Carranza, portfolio manager at Allianz Global Investors, which has been buying Indian debt. “It’s now on every investor’s radar and maybe before this inclusion there wasn’t even a reason to be interested in it given the capital controls.”

India is expected to experience some of the fastest economic growth in the world this year, with the United Nations forecasting growth of 7 percent.

The yield on the country’s benchmark 10-year government bond has fallen 0.19 percentage points so far this year, to 6.98 percent, reflecting rising prices. But it is likely that many funds will still have to overcome complex bureaucratic hurdles to access the market.

“There is a perception that investors have already anticipated the flows, but we tend to disagree,” Carranza added. “Many investors in the sector have to open their accounts to be able to trade Indian bonds. . . these processes, in my experience, take time.

The addition comes weeks after Prime Minister Narendra Modi, praised by investors for his market-friendly reforms, became dependent on coalition partners after his Bharatiya Janata Party lost its parliamentary majority. The shock election result initially caused Indian yields to rise and stock prices to fall, but the impact proved short-lived.

“There was a lot of nervousness around this outcome,” said Madhavi Arora, chief economist at Emkay Global Financial Services in Mumbai. “People have turned the page. »

S&P Global said in May it expected broad economic continuity regardless of the election outcome, announcing it was considering upgrading India’s triple B minus credit rating.

Modi remains “obsessed with fiscal targeting”. . . he really wants India to be modernized by companies like S&P,” Arora said. India “continues to offer a good yield premium relative to its peers and there is a growth story, inflation looks good,” she added.

With Russia excluded from JPMorgan’s index after its invasion of Ukraine and China’s economy weakening, India could also be added to other fixed-income benchmarks, says Gaurav Narain, manager of the India Capital Growth Fund in Mumbai.

Indian bonds will enter the Bloomberg Emerging Market Local Currency Government Index from January, while the country’s debt is tracked by the UK’s FTSE Russell.

However, rapidly changing flows could complicate the Indian central bank’s efforts to control market volatility. Arora said foreign investors might “see that the tide is turning and they would pull out”.

The Reserve Bank of India played down these concerns. Earlier this month, Governor Shaktikanta Das said there should be “no concerns” about the central bank’s ability to handle the ups and downs. “We have achieved it in the past and we will achieve it this time too,” he said.

Analysts and fund managers see India’s foreign exchange reserves, which exceed $650 billion, as enough ammunition to keep the rupee stable.

“There is bound to be more volatility as India integrates further into global markets,” Narain said. “Currently, reserves appear sufficient and will only increase with this inclusion.”

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