Foreigners flock to India's bond market, making a splash across the board

(Bloomberg) - An influx of cash into India is already reshaping markets in a country long keen to insulate itself from the flow of hot money after the country's inclusion in a watershed of major global bond indexes.

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Since JPMorgan Chase & Co.'s landmark announcement in September, foreign investors have injected about 780 billion rupees ($9.4 billion) into the caratelike sovereign and have begun to climb the list of holdings. The inflows have made their mark across a wide range of assets, with corporate bonds outperforming their peers and foreign exchange reserves reaching record highs. The rupee escaped the effects of a broadly stronger dollar.

"This is a big deal. The long-awaited inclusion of India in the index should open the door for more foreign investors," said Chidu Narayanan, head of Asia Pacific macro strategy at Wells Fargo & Co. By the middle of next year, he said, about $25 billion in Indian bond inflows will support the rupee.

Massive capital inflows

The influx of capital has helped India's Fully Accessible Route Bonds (FARs, which will soon join the index) post a dollar return of 2.76% this year, according to data compiled by Bloomberg. they have outperformed both the Global Emerging Sovereign Debt Index and the Asia Emerging Corporate and Sovereign Bond Index.

The inflows make them one of the best performing local currency emerging market bonds in 2024.

Currency Ratio

"You're going to see some 'rush' before the June deadline arrives," said Radhika Rao, senior economist at DBS Group Holdings Ltd. You're going to see some 'scrambling' before the June deadline." We think most of the capital will flow into India as the country begins to be included in the JPMorgan index and when the JPMorgan index reflects the full weight of India's 10% by the end of this year.

One result of the massive inflows is that the Reserve Bank of India has stepped up the pace of intervention and has been buying up the inflow of US dollar funds, resulting in its foreign exchange reserves rising to a record $642.5 billion. The main purpose of the intervention is to protect the rupee from volatility.

Record Reserves

The Reserve Bank of India has stepped up its purchases in recent weeks, buying a total of $20 billion since the beginning of February, according to Bloomberg Economics.

Corporate Bonds

Corporate bonds have also benefited from the inflow of treasury funds, as the former are largely priced at the same level as sovereigns. The yield on the highest rated 10-year bond has fallen by around 30 basis points since the index was published.

Bloomberg Index Services Ltd. will also include some Indian bonds in its emerging-markets local-currency indexes starting next year. Bloomberg LP is the parent company of Bloomberg Index Services, which manages indices that compete with other service providers.

-Written with the help of Srinivasan Sivabalan, Subhadip Sircar and Ravil Shirodkar.

(Second paragraph updated with the impact of foreign capital flows)

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