2024-06-27 01:00:39
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India is set to see billions of dollars in foreign capital inflows when JPMorgan Chase & Co. includes sovereign debt in its emerging-markets index on Friday, a move some analysts say will make the country more vulnerable to volatile hot money inflows.
India’s inclusion marks the first time bonds from the world’s fastest-growing large economy have been included in a major benchmark and is the latest step in opening up a once-closed market following India only removed foreign ownership limits on some rupee-denominated debt in 2020.
The inclusion of 28 government bonds worth more than $400 billion will give India a 10% share of the widely tracked measure, JPMorgan said.
Goldman Sachs said regarding $11 billion flowed into the index as investors positioned themselves ahead of its official inclusion. The bank expects another $30 billion to flow into the index as foreign ownership rises from regarding 2% to regarding 5% as Indian bonds are gradually included in the index over the next 10 months.
The admission marks the culmination of years of negotiations between India’s government, banks and investors, during which India relaxed some burdensome administrative controls and made its bonds more tradable.
“The sentiment towards Indian bonds is pretty strong,” said Carlos Carranza, a portfolio manager at Allianz Global Investors, which has bought Indian bonds. “Now, Indian bonds are on everyone’s radar, whereas before the inclusion, there was probably no reason to look at Indian bonds at all, given the capital controls.”
India is expected to be one of the fastest growing economies in the world this year, with the United Nations predicting growth of 7%.
The country’s 10-year bond yield has fallen 0.19 percentage point so far this year to 6.98%, reflecting higher prices. But many funds may still be overcoming complex bureaucratic hurdles to enter the market.
“Some people think investors have preempted the flow of funds, but we don’t think so,” Carranza added. “Many investors in the industry have to set up accounts to trade Indian bonds… In my experience, these processes take time.”
Prime Minister Narendra Modi, who was hailed by investors a few weeks ago for pushing market-friendly reforms, has become reliant on coalition partners following his Bharatiya Janata Party lost its majority in parliament. The shock election results initially sent Indian bond yields soaring and stock prices falling, but the impact was short-lived.
“The results were very nerve-wracking,” said Madhavi Arora, chief economist at Emkay Global Financial Services in Mumbai. “But people have moved on from that.”
S&P Global said in May that it expected broad continuity in India’s economy regardless of the election outcome and announced it was considering upgrading India’s BB- credit rating.
Modi remains “obsessed with fiscal targets … he really wants India to be rated by agencies like S&P,” Arora said, adding that India “still offers a nice yield premium compared to other countries and has good growth prospects and good inflation.”
With Russia removed from JPMorgan’s indexes following its invasion of Ukraine and China’s economic weakness, India might also be added to other fixed-income benchmarks, said Gaurav Narain, manager of Mumbai-based India Capital Growth Fund.
Indian bonds will be included in the Bloomberg Emerging Markets Local Currency Government Index from January next year, while the country’s bonds are being assessed for the UK’s FTSE Russell index.
However, fast-moving flows might complicate the RBI’s efforts to control market volatility. Arora said foreign investors may “see that the wind is changing and they’re pulling out.”
The Reserve Bank of India has played down those concerns. Earlier this month, Governor Shaktikanta Das said the central bank might handle such volatility and fluctuations “without worry.” “We have managed such situations successfully in the past and we can manage this time as well,” he said.
Analysts and fund managers believe India’s foreign exchange reserves of more than $650 billion have enough ammunition to keep the rupee stable.
“As India becomes more integrated with global markets, market volatility is bound to increase,” Narain said. “Right now, India’s reserves appear adequate and will continue to increase as India becomes part of the global market.”
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