ECONOMIC SECURITY-Foreign Investors Propel Indian Bonds into Global Spotlight

The influx of foreign capital into Indian bonds, triggered by its inclusion in key global bond indexes, is causing significant ripples in the market landscape. This marks a notable shift for India, a country historically cautious about accommodating large capital inflows.

 Since JPMorgan Chase & Co's groundbreaking announcement in September, foreign investors have injected approximately 780 billion rupees ($9.4 billion) into eligible sovereign bonds, propelling themselves up the ownership ranks. This surge in investment has notably boosted corporate bonds, leading to stellar performance metrics. Consequently, India's foreign exchange reserves have soared to unprecedented levels, and the rupee has remained resilient against a backdrop of dollar strength.

 Anticipation is building as the pivotal index change approaches at the end of June. Chidu Narayanan, head of macro strategy for Asia-Pacific at Wells Fargo & Co., underscores the significance of India's inclusion, predicting inflows of around $25 billion by mid-next year, which will likely bolster the rupee. Bonds under the Fully Accessible Route (FAR), slated for index inclusion, have already exhibited strong performance, outperforming global benchmarks for emerging sovereign debt and corporate bonds in emerging Asia.

 Radhika Rao, senior economist at DBS Group Holdings Ltd., notes a preemptive uptick in investment activity ahead of the June deadline, expecting a surge in flows once the inclusion formally commences. Meanwhile, the Reserve Bank of India has escalated its intervention efforts to manage the influx of foreign capital, with foreign reserves reaching a record $642.5 billion. This intervention aims primarily to stabilize the rupee amidst volatile market conditions.

 

The positive spillover effects extend to corporate bonds, as their pricing closely tracks sovereign notes. Notably, yields on top-rated 10-year bonds have decreased by approximately 30 basis points since the index announcement. Looking ahead, Bloomberg Index Services Ltd. will integrate select Indian bonds into its emerging market local currency index from next year, further solidifying India's presence in global bond markets.