By Christina Titus
With the Indian government bonds set to be included in the FTSE Russell Emerging Market Index in September, several factors including difference in yield spreads between US and India will be key for active fund inflows, said market participants.
“The current policy rate differential with the US, is at 100 basis points, far below its historical average of above 400 bps, will definitely act as a deterrent in terms of capital flows,” said Dipanwita Mazumdar, economist at Bank of Baroda.
Currently, the US fed rate is at 4.5% whereas the Reserve Bank of India’s (RBI) repo rate stands at 5.5%. At the same time, the yield on 10-year Indian bond ended at 6.29%, while yield on US Treasury was at 4.29% on Tuesday.
“Any further reallocation of capital will happen when the differential (between India and US bond yields) comes down,” said Vishal Goenka, co-founder of IndiaBonds.
Most believe that active funds will only take bigger interest in Indian bonds once the spread is lucrative for them. Till then, passive funds will be the main participants.
Soumyajit Niyogi, director at India Ratings & Research that the inclusion of Indian bonds in global indices is not something one-way flow, due to the depreciation bias of the domestic currency, which will weigh on foreign inflows . However, he agreed that upcoming inclusion will bring some sort of relief to the ongoing outflow scenario.
FPIs have been in a selling mode over the past months, owing to profit booking and high volatility in the Indian rupee. They sold government securities worth Rs 11,145 crore in April, Rs 12,317 crore in May, and Rs 718 crore in June of the current year, data by the Clearing Corporation of India data showed.
FTSE Russell, the global index provider, announced the inclusion of Indian bonds in the FTSE Emerging Markets Government Bond Index last September. The inclusion will take place in a phased manner on a monthly basis over a six-month period. Market participants expect the index to bring about $3-5 billion initially.
India is already part of JP Morgan Emerging Market Index and Bloomberg EM Local Currency Government Index. Experts said that expectations fell short in case of flows from JP Morgan’s GBI-EM index inclusion.
“As of the June index profiles, 33 INR-denominated Indian government FAR bonds ($508.4 billion in par amount outstanding) are projected to be eligible for the EMGBI, representing 9.05% of the index on a market value weighted basis,” FTSE said in the statement on June 17.
Foreign portfolio investment in FAR bonds grew by Rs 1.85 trillion since September 2023, when JP Morgan announced the inclusion. As of July 2, the FPI investment through FAR stood at Rs 2.86 lakh crore.