JPM did not flood on the first day, but bankers are confident of steady flow going forward

India’s much-hyped inclusion in the JP Morgan bond index got off to a muted start on Friday with lower-than-expected foreign inflows, defying expectations of an immediate flood. Bankers, including top US bank executives, said, however, that billions in foreign investment would continue to be pushed into the debt market of the world’s fastest-growing major economy.

Indian bonds made their debut in JP Morgan’s GBI-EM Global Index suite on Friday, with the country expected to reach a maximum of 10% in the GBI-EM Global Diversified Index over a 10-month period. Analysts at JP Morgan expect the move to bring $20-25 billion in foreign investment into the domestic bond market.

“The inclusion of the index will bring fresh investments from international investors, both active and passive, which will boost overall liquidity in the system,” said Kaustubh Kulkarni, Senior Country Officer, India and Vice Chairman, Asia Pacific, JP Morgan. ET on Friday.

“The pool of active investment capital from FPIs may also flow into other domestic bonds over time, once they become more familiar.”

From Thursday to Friday, total holdings of foreign portfolio investors (FPIs) in the index-eligible fully accessible route (FAR) suite of government bonds stood at Rs. 1,545.16 crore to Rs. 1.86 lakh crore, according to figures released by the Clearing Corporation of India Limited. (CCIL) at 6 pm. Traders were somewhat disappointed by the increase as some market segments on Friday alone saw Rs. 10,000 crores was bet on the surge.

“If you look at the increase in FAR holdings by FPIs for the month of June, it is close to Rs 17,000 crore or $2 billion,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership. “It seems clear that the flow will happen gradually over months rather than a day’s walk.”

The yield on the benchmark 10-year government bond rose a basis point to 7.01% on Friday as the market tempered its expectations from single-day FPI investment. Bond prices and yields move inversely. However, the rupee strengthened 0.1% to close at 83.38 against the dollar as foreign debt inflows helped the local currency. A basis point is 0.01 percentage point.

As the market now adjusts to how flows from index inclusion may accumulate, sentiment remains optimistic, with traders widely expecting $2 billion per month.

“That is likely to translate into flows of ~US$2 billion into monthly government bonds through funds that benchmark the JPM index. Further, the interest is not limited to index-tracking managers, but a wider base of investors who are looking at India as a discretionary addition to portfolios,” said Aditya Bagri, Head, Markets, Citi, India and Indian Subcontinent. “Government bond markets have seen inflows of more than US$10 billion since the news was announced last September as investors are pre-positioned to benefit from lower yields resulting from index-related inflows.”

Global funds are adding exposure to the 10-30 year segment of government bonds, he said.

Senior foreign bankers said on condition of anonymity that global funds such as BlackRock, Ashmore and Pimco had increased activity in the past few weeks, with some passively managed players also participating on Friday.

Hui Hsien Koye, fixed income strategist for BlackRock’s lead index, APAC, told ET last month that maximum interest in Indian bonds is spread among European real-money asset managers as well as their Asian counterparts. BlackRock launched an Indian government bond ETF in February.

“FAR data shows settled trades done by FPIs, but overall today around Rs. 4,000 crore was foreign activity. Out of this, about Rs. 1,400 crore was on the sell side,” said a foreign banker.

FPIs’ largest security-wise holdings in the FAR category of bonds were 7.18%, 2033 bonds, at 12.4% and 5.74%, 2026 bonds, at 10.32%, CCIL data showed.