JP Morgan index inclusion boosts $18 bn flows into local bonds in 1 year

Since JP Morgan announced the inclusion of Indian sovereign bonds in one of the US bank's major global debt indices a year ago, foreign investors have pumped in ₹1.5 lakh crore (around $18 billion) into the local market and the pace of flows may quicken further after the Federal Reserve kicked off an easing cycle last week.

On September 22, 2023, local bond traders woke up to the news that India would be included in JP Morgan's GBI-EM Global index suite starting June 28, 2024; a move that was estimated to bring in flows worth $20-40 billion into domestic sovereign debt.

From that day to September 20 of this year, the indicative value of aggregate holding of foreign portfolio investors in Fully Accessible Route (FAR) government bonds has shot up by ₹1.49 lakh crore (around $17 billion based on the latest exchange rate) to ₹2.44 lakh crore, latest Clearing Corporation of India (CCIL) data showed. On September 21, 2023, the FPI investment in the FAR bonds was at ₹94,416.14 crore. FAR bonds are the securities that are eligible for index inclusion.


Last week's 50-basis-point rate cut by the Fed and reassurance on economic growth may now give a fresh fillip to the overseas interest, given a wider rate differential between India and the US and resilient domestic economic fundamentals.

"I would expect that Indian assets, including other EM assets, will continue to be beneficiaries of FPI inflows," said Nitin Agarwal, head of trading at ANZ.

$18B Flows into Local Bonds in a Year

“In August, the FPI inflows crossed $3 billion, which was higher than market expectations, and I would continue to expect higher inflows continuing into Indian assets. In terms of percentage of debt flows, India will get a handsome share, among its EM peers.”

Prior to JP Morgan’s announcement in September last year, the degree of FPI interest in the FAR category of Indian bonds had been of a much lower order. Overseas investment in the FAR securities had risen by Rs 34,491 crore from September 22, 2022 to the same date the next year, the CCIL data showed.

Given that the Fed has only just started lowering interest rates from near-20-year highs, Indian debt stands well-poised to attract a faster pace of FPI flows as the US dollar progressively weakens.

“FPI inflows through FAR will pick up as US rates normalise by mid of next calendar year. Inflows could go up anywhere from $2 to $3 billion per month, as the liquidity flows into the emerging market picks up with a broad USD weakness,” said Ashhish Vaidya, head of treasury at DBS Bank.

The consistent foreign money that has poured in since last year has helped bring down yield on the 10-year benchmark government bond by 37 basis points from 7.14% on September 14, 2023 to 6.77% at close on Monday. A fall in government bond yields brings down cost of borrowing across the economy as sovereign debt is the pricing benchmark for corporate debt.

"Wider index inclusion could increase foreign participation in India’s government bond market to 10% from 0.9% in 2023, and that this would enable funds available for corporate debt issuers in India to almost triple relative to nominal GDP by 2030,” economists from S&P Global wrote last week.