Connecting with the world: Will more inflows provide a booster dose to India’s economy? , clear news


Last week, JPMorgan Chase & Co. became the first global index provider to include Indian government bonds in its emerging markets index (GBI-EM), following which India may have seen a surge in dollar inflows.

Other major global investment companies are said to be in a wait-and-see mode to bring India into their investment index baskets.

These flows come with their own risks and challenges. And there is considerable difference of opinion on when foreign money might start flowing into the country. But from a macroeconomic perspective, there is consensus on the fact that the increase in inflows is expected to boost India’s overall fiscal and balance of payments dynamics. Also, higher inflows may help keep the rupee strong but may have an impact on retail inflation.

What was JP Morgan’s decision?

inclusion of government bonds The sorting will be done over a period of 10 months starting from June 28, 2024 to March 31, 2025. JPMorgan’s bond indices will include eligible bonds from India in its emerging markets and derivative bond indices. Global investors allocate funds to different countries based on their weighting in major indices. This means that if India can include more such bond and equity indices, there will be a significant increase in capital inflows.

According to analysts’ estimates, this inclusion could result in an inflow of about $25-30 billion in the government securities market.


“With the Russia boycott and troubles in China, options for global debt investors have reduced. Hopefully the rating agencies will respect the investors’ viewpoint and drop their moody and poor standards,” said Nilesh Shah, MD, Kotak Mahindra Asset Management Company.

Goldman Sachs believes that foreign funds can start coming into the country immediately. “Given that several EM (emerging markets) dedicated funds are already established in India, we expect inflows to start immediately as investors prepare to join next year,” Goldman Sachs said in a note. “

“The timelines were likely to be driven by strong demand from benchmark investors and the ongoing re-weighting process. The move is likely to lead to strong foreign portfolio inflows. Volume will also be influenced by broader risk-appetite. The inflows will be supportive of fiscal and balance of payments dynamics,” said Radhika Rao, senior economist at DBS Group.

More index inclusions on the way?

This is not a JP Morgan issue alone. It is reported that others are waiting and watching. Another major index provider, FTSE Russell, also has an Indian bond tracking index for inclusion in its emerging markets gauge. Incidentally, the FTSE Emerging Markets Government Bond Index-Capped (EMGBI-Capped) had total funds raised (AUM) of $1477 billion by the end of August, making it six times larger than the JPM GBI-EM GD. One analyst said, “If the absorption process at JPMGBI-GM materializes, we could see another large absorption by mid-2025.”

“We believe the choice of JPM GBI EM may be a deliberate move on the part of the government and the RBI to ensure that there is a natural progression to future developments, reducing potential points of friction To grow and mature organically. Add to this the third index, Bloomberg Barclays EM Bond Index, and the fund flow numbers increase significantly,” said Soumya Kanti Ghosh, group chief economic advisor, State Bank of India.

IDFC First Bank said in a note that after being included in the JP Morgan EM Bond Index, India’s chances of being included in the Bloomberg Global Aggregate Index have also increased. “If India is included in the Bloomberg Global Aggregate Index, it could lead to investments of $15 billion to $20 billion, with India’s weighting at 0.6 per cent to 0.8 per cent,” it said.

What will be the effect?

Interest Rates: Analysts say higher inflows could put downward pressure on interest rates. Foreign demand for government bonds will reduce their yields, which will reduce pressure on interest rates in the financial system. This will be much before the date of induction, i.e. June 2024.

Corporate and Markets: Most corporate bond yields are determined by the yields on government bonds. “Therefore, there will be a decline in yields in all industries across India. VK Vijayakumar, chief investment strategist at Geojit Financial Services, said the fall in cost of capital will translate into higher profits for the corporate sector, which in turn will boost stock prices, allowing the stock market to reach higher levels.

The growing bond market is expected to grow further with the expansion of the investor base and steady inflows. “This (JP Morgan) inclusion will deepen the bond market in India,” said Shah of Kotak AMC.

Rupee: On the other hand, the rupee is likely to remain strong on higher inflows but will weigh on retail inflation. However, the RBI has several tools at its disposal to keep the rupee stable and liquidity conditions at comfortable levels. Retail inflation likely to rise on strong inflows

What is the impact on the external front?

The increase in inflows, coupled with India’s inclusion in the JPMorgan GBI-EM index and the possibility of inclusion by other global indices, means that forex reserves are expected to grow significantly in 2024 and 2025. There may be positive sentiments regarding inclusion in the JP Morgan index. For some inflows in the remaining part of FY23. With the current account deficit (CAD) expected to remain between 1.5-1.6 per cent of GDP, these inflows will help boost India’s balance of payments (BoP) surplus. However, real inflows are expected only after June 2024, when the bonds will be formally included in the index.

According to a Bank of Baroda report, these inflows will be significant as India’s CAD is expected to reach 2 per cent of GDP in FY2025 amid pick-up in global and domestic growth and higher commodity prices. In such a scenario, index-related inflows would help finance the higher CAD and build foreign exchange reserves.

“This would require more stringent monitoring and intervention by the RBI, suggesting that some of the foreign exchange reserves accumulated due to index-related flows would be needed to keep the currency range-bound,” it said.

Overall, India’s growth is expected to get a booster dose in the financial year 2023-25. RBI has estimated a growth rate of 6.5 percent for the current financial year.

What are the concerns?

The huge flow of foreign debt comes with its own macro-prudential risks. While the risk of rising retail inflation is a possibility, FPI (foreign portfolio investor) flows are volatile and highly dependent on external factors. “In the event of any adverse external shock, investors move away from riskier markets like India, which may lead to capital flight. This would create a risk of extreme instability in India’s financial markets. Both the bond market and the domestic currency will be affected,” the BOB report warned.

The sudden exit of foreign investors can also impact the stock markets, causing huge losses to investors.

Historically, there have been some instances when the rupee has declined sharply due to capital outflows. In short, inclusion in such indices exposes the country to higher financial sector volatility. This will require strong monitoring and intervention by the RBI and the government. It said that RBI has to do its job to ensure stability in financial markets and prevent spillover effects from financial markets into the real economy.

What are the foreign players doing so far?

So far, in the calendar year 2023, foreign portfolio investors (FPIs) have invested Rs 28,905 crore in the country’s debt market, while there has been an outflow of about Rs 9,000 crore in the same period of 2022. Very low by global standards, it was expected that the country would be included in global bond indices. Other factors driving flows into the debt market include high interest rates, improving growth prospects of the country, low inflation compared to other economies and a stable rupee.

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Market experts believe that with clarity on the inclusion of Indian bonds in JPMorgan’s emerging market bond index, flows into the debt market will be driven more by the outlook on inflation, economic growth and interest rate outlook. He also believes that FPI investment in equities may slow down due to overvaluation concerns.

FPIs have invested Rs 1.22 lakh crore in Indian equities so far in calendar year 2023. However, there has been a withdrawal of Rs 10,164 crore from equity markets by FPIs in September.

However, Nomura said in its report that the risk of further outflows was rising, as twin-deficit and election-related concerns dampen sentiment. “Our equity strategists believe that higher oil prices may also provide a reason for foreign investors to reduce their equity stakes,” it added.

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