Mutual Fund Update

Inclusion of Indian in JP Morgan Global Bond Indices is structurally positive for Indian bonds

Highlights:

• JP Morgan adds Indian Government Bonds to Global Bond Index – Emerging Markets. Only IGB issued by the Reserve Bank of India (RBI) under fully accessible route (FAR) will be included.
• The inclusion of the Indian Government bonds will be staggered over a period of 10 months with 1% increments per month from 28th June 2024 to 31st March 2025. This would lead to inflows of $22-23 billion over a period of time.
• The move raises possibility of Indian Bond addition to Bloomberg Barclay Bond Index, resulting in further inflows into IGB.
• Event is structurally positive and would positively impact bond yields, liquidity and Indian currency.
• Strategy – Fixed Income: Investors could tactically increase exposure to duration (4-10 years) including Gilt funds once bond yield settle down as the knee jerk reaction rally eases out.
• Strategy – Equity: Event is positive for PSU banking stocks (including PNB Gilts) and accordingly investors could make some tactically investment in PSU banking funds.

Event: JP Morgan, an index provider for widely tracked Emerging Market (EM) bond indices, announced inclusion of Indian government bonds (IGB) to its Global Bond Index – Emerging Markets (GBI-EM) with effective from June 2024. India’s weight starts at 1% and will increase by 1% each month to reach 10% cap by March 2025. There is close to Rs28 trillion (lakh crore) worth of IGB eligible for buying by the global passive funds.

Expect significant foreign inflows in Indian Govt Bonds ahead
According to estimates, JP Morgan Global Bond Index accounts for $225-230 billion of investments from global investors. Considering that the current passive investors have zero exposure to India, it could mean inflows of close to $22-23 billion over a period of time. However, the announcement by JP Morgan could prompt other index providers to include IGB and consequently, the inflows could be around $30 billion (or around Rs2.5 trillion) as compared to total investment of less than Rs0.7 trillion now.

Hence, it is a structurally positive move for Indian bond market. The stable and strong foreign inflows in IGB would positively impact bond yields, liquidity and currency (INR). Also, it would help bridge the gap in Balance of Payments (BoP) for India. Accordingly, the 7.18% 2033 government bond yield eased to 7.11% post the announcement of India’s inclusion by JP Morgan.

Investment Strategy: Retain tactical call to increase exposure to duration (4-10 years)
As part of our monthly Investment Summary Report, we have been recommending increasing exposure to duration (4-8 years) modified duration funds including gilt funds. On the positive side, we believe that RBI is likely to retain status quo on interest rates and the supply of IGB could also be limited in H2 of this fiscal. On the flip side, the rising crude oil prices, strengthening of USD and hawkish US Federal Reserve would act as balancing factors. Hence, it would be advisable to wait for bond market to settle down post the knee jerk reaction to increase exposure to gilt funds.

(Performance as on 21 Sept 2023)