Foreign Portfolio Investors Boost Indian Bonds Amid JP Morgan Inclusion

Foreign Portfolio Investors (FPIs) are pouring capital into Indian government bonds following their inclusion in JP Morgan's index, with significant inflows expected. A State Bank of India (SBI) report highlights potential benefits such as enhanced liquidity, lower yields, and support for the balance of payments.

Foreign Portfolio Investors (FPIs) are responding positively to the inclusion of Indian government bonds in JP Morgan’s index. According to a report by the State Bank of India (SBI), FPI holdings have risen by Rs 16,990 crore since June 2024 and by Rs 95,687 crore since JP Morgan Chase & Co announced the bond inclusion in October 2023.

The SBI report, released on Tuesday, anticipates the index inclusion of Indian bonds will attract around USD 2 billion in investments over the next nine months. The report suggests this will increase demand for government bonds, leading to lower yields and a more substantial impact on short-end yields.

Furthermore, 38 securities under FAR are currently eligible for JP Morgan's index, with only 4.5 percent of the Rs 37 trillion utilized, indicating significant potential for further investments. The anticipated foreign investments are expected to enhance the depth of the government bond market and support system liquidity by lowering yields and bolstering the balance of payments surplus, which would add to forex reserves.

Additionally, FPIs will play a vital role in easing the current cash crunch caused by the Just-In-Time mechanism, potentially stabilizing the financial system. The SBI report warns, however, that global events causing outflows could destabilize the Indian financial system.

As per the report, the Reserve Bank of India (RBI) has actively managed liquidity through its variable rate repo and reverse repo auctions, crucial for sustaining market stability. The JP Morgan and Chase index inclusion, which began on June 28, 2024, could bring USD 20-25 billion into the Indian bond market, with USD 10 billion already attracted since the announcement in September last year.