Brace for a foreign portfolio investors (FPI) inflow surge in the debt markets in early 2024, ahead of Indian bond inclusion in global bond indices in June 2024, economists and analysts said.

The country is expected to see “front loaded inflows” in the debt segment from FPIs in the first quarter of calendar year 2024 itself, they said.

This is also expected to cushion the country’s ability to comfortably finance the current account deficit, despite the risk of some widening in the deficit in the second half this fiscal, they added.

“Despite risks to the current account, financing requirements are unlikely to be a concern, given India’s impending bond inclusion.

While most of the inflows will likely come next year (as the index inclusion is scheduled for June 2024), we expect some front-loaded inflows in FY ’23-24, possibly picking up traction in Q4 FY24,” said Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, said in a note post the BoP data announcement by the RBI on Tuesday.

JP Morgan had in September this year announced that 23 Indian bonds will be included (in its Global EM bond index) with a notional value of $330 billion from June 2024. The share will rise up to 10 per cent in 10 months at an incremental rate of 1 per cent per month. 

In 2024, Indian sovereign bonds are not only expected to be included in J P Morgan’s EM Bond Index, but also in other global indices such as the Bloomberg Index, indicating additional inflows to the tune of about $40-50 billion in the Indian debt market. 

Listen: JPMorgan bond index inclusion: What it means for Indian bond markets?

Madan Sabnavis, Chief Economist, Bank of Baroda, told businessline that the inclusion of Indian bonds in JP Morgan bond indices from June 2024 onwards will have investors take positions in Indian bonds three-six months in advance. This will help them take advantage of price movements once the inclusion takes place, he said. “Therefore, we can expect some additional buoyancy in FPI flows in the first two quarters of 2024 that will cushion the higher CAD,” Sabnavis added.

“The Current Account Deficit (CAD) has come down in Q2, which is good news. This will tend to increase in the next two quarters, as the trade deficit widens. But this will not be a major concern for us”.

Interestingly, FPIs are already positioning themselves to ride the upcoming opportunity in debt market movements in the second half of 2024, enhancing the quantum of flows in recent months.

In November 2023, FPIs pumped in ₹14,860 crore and, so far in December 2023, FPI inflows in debt have stood at a record ₹17,785 crore (highest this calendar year), depositories data showed.

Analysts now expect inflows from FPIs in 2024 to be much stronger than in the current year, when they pumped in over $20 billion in equities. 

Currently, only around 19 per cent of the total limit offered (in debt market) is utilised by FPIs in the Indian debt markets. However, the proposed inclusion of Indian bonds in the global indices will add buoyancy to FPI interest in the Indian debt market, economists and analysts said.

When Indian bonds, essentially government securities (G-Secs), are included in a global index, the Indian bond market gets a fillip as foreign funds would buy G-Secs in larger quantities than they are doing today. 

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