Surge in Foreign Inflows Propels Indian Bonds to 6-Year High Ahead of JPMorgan Index Inclusion

In a significant turn of events, foreign investment in Indian government bonds witnessed an extraordinary upswing in the final quarter of 2023, reaching a six-year high. This surge is attributed to JPMorgan’s announcement to include Indian debt in its indexes, driving net purchases and positioning India as a lucrative destination for global investors.

Key Highlights:

1. Remarkable Q4 Inflows: Foreign investors demonstrated strong interest in Indian government bonds, resulting in a net purchase of bonds worth 350 billion rupees in the last quarter of 2023.
2. Six-Year High Inflows: The robust performance in Q4 propelled the full-year tally to 598 billion rupees, marking the highest level since 2017, as indicated by clearing house data.
3. JPMorgan’s Index Inclusion: JPMorgan’s decision to incorporate Indian bonds in its Government Bond Index-Emerging Markets, effective from June, triggered heightened investor confidence and is anticipated to usher in additional inflows.
4. Positive Outlook for 2024: Fund managers express optimism for the New Year, expecting continued inflows into the local currency asset class. Factors contributing to this positive sentiment include controlled inflation, fiscal stability, and potential rate cuts by the Federal Reserve.
5. Expectations of Lower Bond Yields: Market experts anticipate that a combination of controlled inflation in India and rate cuts by the Federal Reserve could drive the 10-year benchmark bond yield below 7% in 2024.

Jean-Charles Sambor, Head of Emerging Markets, Fixed Income at BNP Paribas Asset Management, emphasized the positive outlook for India in 2024. He anticipates sustained inflows into the local currency asset class, emphasizing that India’s well-contained inflation and fiscal stability contribute to its attractiveness for investors.

The inclusion of Indian bonds in JPMorgan’s index is predicted to result in incremental inflows of approximately $25 billion into the bond market. As global central banks, including the Federal Reserve, signal potential rate cuts in 2024, the yield differentials could further enhance India’s appeal for foreign investors.