Foreign portfolio investors (FPIs) are gradually loading upon on Government Securities (G-Secs) as the date for inclusion of these Securities in the JP Morgan Global Bond Index - Emerging Markets Global Diversified (GBI-EM GD) is drawing closer.

FPIs holding in total ownership of G-Secs (or India Government Bonds/IGBs) saw the maximum increase of 31 basis points (bps) amongst all categories of investors, moving up to 1.92 per cent as on December-end 2023 against 1.61 per cent as on September-end 2023.

This increase in FPIs’ G-Sec holding comes against the backdrop of the proposed inclusion of these securities (specified G-Secs under the fully accessible route/FAR) in JP Morgan’s GBI-EM GD over a 10-month period. The inflows into these securities due to this inclusion is estimated at about $22 billion to $25 billion.

After JP Morgan made the index inclusion announcement on September 21, 2023, Bloomberg (in early March 2024) announced inclusion of India FAR bonds in its Emerging Market (EM) Local Currency Government Index and related indices. The inclusion in the Bloomberg will be phased in over a ten-month period, starting January 31, 2025, and is expected to bring in $2 billion to $3 billion inflows.

FPIs seem ready to make the most of the expected G-Sec yield softening once liquidity inflows begin due the aforementioned developments. “With almost $25-30 billion expected to be invested by FPIs in specified G-Secs due to the bond index inclusion, the active funds among them are buying securities. This will only increase.

“Global investors have a positive outlook on Indian bond yields as inflation, current account deficit and fiscal deficit are under control, growth is gaining momentum, and forex reserves are at an all time high. All macroeconomic parameters are favourable. This will attract funds into debt as well as equities,” said V Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank.

After FPIs, the maximum increase in holding in total ownership of G-Secs was in the case of provident funds (up 15 bps from 4.42 per cent as at September-end 2023 to 4.57 per cent as at December-end 2023); followed by pension funds and corporates, up 12 bps each, from 4.32 per cent to 4.44 per cent and from 1.21 per cent to 1.33 per cent, respectively; and insurance companies, up 11 bps, from 26.05 per cent to 26.16 per cent.

During the third quarter (October-December 2023), the outstanding G-Secs rose by ₹1,55,185 crore to ₹1,05,38,792 crore as at December-end 2023.

The holding of RBI in total ownership of G-Secs declined 52 bps during the third quarter from 13.06 per cent to 12.54 per cent due to open market operation (sales), secondary market sales and redemption of these securities, say market experts.

The holding of commercial banks in total ownership of G-Secs also saw a drop of 41 bps from 37.96 per cent to 37.55 per cent as they tried to capitalise on the decline in yields towards the end of the third quarter to boost their bottomline.