India's entry into the JP Morgan GBI-EM Global Diversified Index marks a positive development. India has been on Index Watch Positive since 2021 for inclusion into the GBI-EM following the Indian government’s introduction of the FAR program in 2020 and substantive market reforms for aiding foreign portfolio investments.
India’s Fully Accessible Route (FAR) securities will be included in the JP Morgan GBI-EM Global Diversified Index (and other related indices) from June 28, 2024, with a weight of 10%, staggered over 10 months. Around US$330 billion ( ₹27 trillion) of FAR securities are eligible for inclusion of the outstanding FAR securities of US$400 billion ( ₹33 trillion).
Domestic brokerage firm Kotak Institutional Equities expects this inclusion will raise FPI ownership in Indian GSecs to around 3.5%–4.0% by FY2025, up from 1.6% currently. In value terms, this move is expected to bring approximately US$30 billion in inflows in the same period.
Though such substantial inflows should lend support to the Indian currency, the brokerage notes that factors such as elevated crude oil prices and higher global interest rates will strengthen the USD, which exertpressure on the Indian currency.
It expects the USD-INR exchange rate to remain within the range of 82.5-83.5 in the near term, with a shift towards 81.5-83.5 in the next 6–12 months once global uncertainties subside.
The brokerage anticipates FPI inflows in debt to provide support largely to the belly of the curve (7–14-year bucket). However, given the RBI’s preference for tight liquidity conditions, it expects reasonable scope for OMO sales (the RBI conducted a net OMO sale in the secondary market worth ₹52 billion in the past three months), limiting the gains.
The far end of the curve (15+ years) should further remain supported amid low net GSec supply in 2HFY24 and demand by long-term domestic investors. However, higher crude oil prices and elevated US Treasury yields should limit bond market gains, the brokerage stated.
In the near to medium term, it projects the 10-year yield in the range of 7–7.15%, with the dated yield curve remaining on a flattening to inverted bias.
Beyond the euphoria of bond inclusion, the index inclusion opens up India’s fiscal situation to greater scrutiny, with spending quality, efficiency of tax and other receipts collection, and adherence to the fiscal consolidation path being closely monitored, the brokerage pointed out.
Among index constituents, India’s GFD/GDP and government debt/GDP are quite high. The central government has committed to a GFD/GDP of around 4.5% by FY2026. This will possibly be the first monitorable and will also set the base for the extent of spending growth and the degree of tax buoyancy in the near to medium term, it added.
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