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New Delhi Foreign investors could pump in as much as $100 billion into the Indian debt market over next 3-5 years, HSBC Mutual Fund has said in a new report on Wednesday.
While index related flows (arising from India’s recent inclusion in global bond indices) could touch $50 billion, there is also an expected additional foreign portfolio investors’ (FPI) flows of $50 billion from standalone strategic allocations to Indian bonds, it added.
Even after $100-billion inflow materialises, the foreign investor proportion will be just 8-9 per cent of the Indian bond market, according to the report titled “India Bond Markets-Coming of age”.
Currently, foreign investors own about 8-9 per cent of China bonds ($ 490 billion). Of this, about one third is strategic investments by central banks and international organisations.
“As part of their EM allocations, large institutional investors are likely to closely track and get more familiar with the Indian bond markets, with increasing comfort around operational access issues.
As these investors appreciate the various positive aspects of India bonds, we believe they may start considering strategic allocations to India bonds and not just as part of their EM Index allocations”, wrote Shriram Ramanathan, CIO-Fixed Income, HSBC Mutual Fund and lead author of the report.
Currently, FPIs own just 1.6 per cent of Indian government bonds which is minuscule compared to other emerging markets. Excluding the G3 currency blocks, Indian government bond market is now the third largest in the world after China and the UK.
Even with incremental index flows of $50 billion into Indian government bonds in next 3-5 years, total FPI ownership of Indian government debt will be about 5 per cent.
HSBC Mutual Fund Report highlights that India was ticking all the boxes on the parameters that decide strategic allocations by FPIs. These parameters include large and liquid market; macro policy credibility; value in a global FI portfolio; attractive yields and currency stability.
Positive factors
Other positive factors include the improved business and political stability, favourable demographics, regulatory initiatives and friendly environment for sovereign investors, it added.
JP Morgan had in September 2023 announced the inclusion of Indian government bonds in its emerging market index starting June 2024, marking the first global index to do so after more than a decade of talks between Indian authorities and global indices.
This inclusion in JP Morgan’s EM index is estimated to bring in inflows worth $25-40 billion, analysts said. Bloomberg Index Services had in December 2023 announced a proposal to include India bonds (India’s Fully Accessible Route, or FAR bonds) in their emerging markets local currency index. Put simply, FAR bonds are securities that have no investment curbs for foreigners.
FPIs have bought more than $4 billion worth of Indian government bonds since index inclusion announcement.
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