Long-term trends will depend on sustained investor interest, India's economic performance, and regulatory environment - Venkatakrishnan Srinivasan, Managing Partner, RockfortFincap

Mumbai: Since the announcement of India's inclusion in the JP Morgan Emerging Bond Market indices last September, India's bond market has attracted significant overseas inflows till date. India will be included in JP Morgan Emerging market Bond Index from June 28.

India's bond market has attracted significant overseas inflows. Indian sovereign bonds have already received $8 billion into the fully accessible securities route since this announcement came in September 2023. Experts feel that it’s time to watch Indian G-Sec yield movements.

This influx raises questions about the sustainability of these inflows, future yield movements, and potential investor behaviour.

The inclusion of Indian G-Secs in the JP Morgan bond index is expected to result in an initial dip in 10-year government bond yields due to increased demand from foreign portfolio investors (FPIs).

However, the continuous supply of bonds by the RBI will moderate this effect.

Talking to Bizz Buzz, Venkatakrishnan Srinivasan, Managing Partner, RockfortFincap, a financial advisory firm, said, “Long-term trends will depend on sustained investor interest, India's economic performance, and regulatory environment.”

Sustained inflows will depend on India’s economic fundamentals, such as GDP growth, inflation, and fiscal policies. Initial profit booking is likely, but overall inflows should remain robust, he said.

If FPI inflows are weaker than expected, the yield dip will be less pronounced, potentially leading to market volatility and reassessment of investment strategies.

JP Morgan recently said that most of its clients were ready to trade in the IGB (Indian Government Bonds) market. JP Morgan estimates that inflows will be between $20 billion to $25 billion in a span of 10 months. Its emerging market bond gauge currently has $216 billion of assets under management. India's weight is expected to reach 10 per cent GBI-EM Global Diversified and approximately 8.7 per cent in the GBI - EM Global Index.

In 10 months, there will be an incremental increase of 1 per cent every month to reach the maximum of 10 per cent. There are several India dedicated bond exchange-traded funds and UCITS funds offering liquidity to investors. These steps have improved the overall market accessibility and tradability for FPIs, making investors more comfortable in investing in the IGB market.

The Indian 10-year bond yield is currently at 6.99 per cent. It had gone up to 7.06 per cent on June 4 when NDA majority was in doubt.It again fell after NDA formed the Government.

Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors says, “As food inflation is on the rise, I do not expect yields to fall much despite investment from FPIs.”

Already $8 billion has come into the country, so I do not expect much flow to start immediately, with weight increasing slowly, he added.

Also, US short-term yields are quite attractive to FPIs, which will enable them to invest in safer instruments then riskier instruments in an uncertain environment and also with US going in for rate cuts by end of year. Indian government policies and the budget at the end of July will also be one of the factors for FPIs to watch before they invest in a big way.

Ultimately investments depend on global factors, Indian growth and policies/priorities pursued by the Indian government.