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India is poised to welcome an inflow of billions of dollars from abroad when JPMorgan added the country’s sovereign debt to its emerging market index on Friday, a move that some analysts said will leave it more vulnerable to volatile hot money flows.
India’s inclusion marks the first time the bonds of the world’s fastest-growing major economy have been included in a major benchmark and is the latest step in opening up a once-closed market. It was not until 2020 that India removed foreign ownership restrictions on some rupee-denominated debt.
The inclusion of 28 government bonds worth more than $400 billion will give India a 10 percent stake in the widely watched measure, according to JPMorgan.
About $11 billion has flowed into Indian bonds as investors brace for formal inclusion, according to Goldman Sachs. The bank expects another $30 billion to arrive as the bonds are phased into the index over the next 10 months, increasing foreign ownership from about 2 percent to about 5 percent.
The entry caps years of negotiations between India’s government, banks and investors, during which the country loosened some burdensome administrative controls and improved the tradability of bonds.
“The sentiment is quite significant,” said Carlos Carranza, a portfolio manager at Allianz Global Investors, which has bought Indian debt. “It’s on every investor’s radar now, and maybe there wasn’t even a reason to look at it before this inclusion given the capital controls.”
India is expected to be one of the world’s fastest-growing economies this year, with the United Nations forecasting an expansion of 7 percent.
The yield on the country’s benchmark 10-year government bond has fallen 0.19 percentage point to 6.98 percent so far this year, reflecting rising prices. However, many funds are likely still overcoming complex bureaucratic barriers to market entry.
“There is a perception that investors have already driven the flows, but we tend to disagree,” Carranza added. “Many investors in the industry have to open their accounts to trade in Indian bonds. . . these processes take time in my experience.”
The additions come weeks after Prime Minister Narendra Modi, buoyed by market-friendly reforms by investors, began relying on coalition partners after his Bharatiya Janata Party lost its parliamentary majority. The shock election result initially sent Indian yields soaring and stock prices falling, but the impact proved short-lived.
“The result was very nervous,” said Madhavi Arora, chief economist at Emkay Global Financial Services in Mumbai. “People have moved on from there.
In May, S&P Global said it expected broad economic continuity regardless of the election outcome and announced it was considering raising India’s credit rating to triple B-minus.
Modi remains “obsessed with fiscal targeting. . . he really wants India to upgrade from S&P,” Arora said. India “still provides a good yield premium compared to its peers and there is a growth story, inflation looks good”, it added.
With Russia out of the JPMorgan index after the invasion of Ukraine and a weakening Chinese economy, India may also be added to other fixed-income benchmarks, says Gaurav Narain, manager of the India Capital Growth Fund in Mumbai.
Indian bonds will enter the Bloomberg Emerging Market local currency index from January, while Britain’s FTSE Russell rates the country’s debt.
But fast-moving flows could complicate India’s central bank’s efforts to control market volatility. Arora said foreign investors may “see the wind changing and pull back”.
The Reserve Bank of India played down these concerns. Earlier this month, Governor Shaktikanta Das said there should be “no worries” about the central bank’s ability to handle the ebbs and flows. “We’ve done it in the past and we’ll do it this time,” he said.
Analysts and fund managers see India’s foreign reserves of more than $650 billion as enough ammunition to keep the rupee stable.
“As India integrates further into global markets, volatility is bound to increase,” Narain said. “Currently, the reserves appear to be adequate and will only increase with this inclusion.”