bond prices: Bond Street to see $2-3 billion foreign inflows a month after inclusion in JP Morgan Index

Mumbai: The sovereign debt market will see foreign flows worth $2-3 billion per month once domestic bonds are included in a JP Morgan index this week, with the pace likely to accelerate once the US starts cutting rates, Standard Chartered Bank‘s India head of financial markets said.

“We have a different profile spread across clients. There are real money clients who may be investing in India off-benchmark. Then there will be the passive index trackers who will be the regular ones coming each month and we may see some large allocations come in intermittently. So, around $2-3 billion per month is what we expect,” Parul Mittal Sinha, head – financial markets, India & co-head, macro trading, ASA, Standard Chartered Bank, told ET.

Indian bonds will be included in JP Morgan’s GBI-EM Global index suite starting June 28 and are expected to reach a weight of 10% over a 10-month period. In a recent note, JP Morgan’s officials said that assuming an index-neutral position, foreign investment worth $20-25 billion could flow to Indian bonds following index inclusion.

Providing a view on how foreign flows may shape up if the Fed were to deliver a much-sought-after rate cut this year, Sinha said that the event would finally propel developed market flows into emerging markets after a two-year drought.

“If the Fed starts cutting, the one-time allocations, the fast-money names, they will definitely want to make use of that opportunity to enter (Indian bonds) ahead of normal flows. That will have a positive effect on all Asian markets as the DXY (dollar index) starts to normalise,” she said.Standard Chartered Bank’s research team estimates two rate cuts by the US Federal Reserve in 2024, Sinha said. On the domestic front, Sinha said that the Reserve Bank of India may also reduce rates twice in 2024, with the first cut potentially being delivered in October.”At these levels, purely from how the setup is, we think the 5-year segment (in government bonds) does offer good value because from here, the rate cuts whenever they happen, will benefit the shorter-end very quickly and that will also be aligned with liquidity normalisation,” she said. She expects yield on the 10-year benchmark government bond to fall to 6.75% by the end of September. The 10-year bond yield closed at 6.99% on Tuesday. Bond prices and yields move inversely.Sinha said that for foreign investors, one of the major reasons for increasing India exposure was the stability of the rupee. Taking into account the dynamics of “carry” and volatility for the rupee, the currency had dramatically outperformed other emerging market and Asian currencies, she said. A “carry” refers to the return earned on a higher-yielding currency financed by a lower-yielding currency.

“India is a very good diversification option, good macros and stable currency. For medium-to-long-term investors it’s a very good story. Short-term investors would perhaps like a little bit more volatility,” she said, providing a broad estimate of 83.00-83.50/$1 for the rupee. The rupee closed at 83.43/$1 Tuesday.

Sinha pointed to firm overseas interest in instruments such as Total Return Swaps and supranational bonds as evidence of the desire for exposure to Indian debt amongst a segment of foreign players who were yet to obtain licenses here. Such flows would continue for at least the next three months, she said.