India’s bond moment
Indian government bonds have successfully secured a coveted position in JP Morgan’s Emerging Markets bond indices. This accomplishment is a significant milestone for the Indian financial market and holds substantial implications for global investors and the broader economic landscape.
JP Morgan, a renowned financial services institution with diverse interests encompassing commercial banking, asset management, and index research and development, curates a suite of bond indices that are tailored to various countries and regions. These indices serve a pivotal role in international finance, akin to the role played by benchmark indices like NIFTY 50 or SENSEX in the equities domain, but with a focus on the fixed-income market.
The primary function of these bond indices lies in facilitating international investors’ access to a diverse array of bond offerings from different countries. Until recently, India had not featured within any of JP Morgan’s bond indices. However, this landscape is set to undergo a transformative shift, as India is poised to become an integral component of JP Morgan’s prestigious Emerging Market bond indices.
Commencing from June 28, 2024, India will be accorded a 1% weight within the index. This allocation is planned to incrementally increase by 1% each month, culminating in a cap of 10% by March31, 2025. The implications of this development are profound, as it portends a substantial influx of foreign investments into Indian government bonds.
Estimations suggest that the inclusion of Indian government bonds in JP Morgan’s indices has the potential to attract a considerable sum. Edelweiss Mutual Fund has reported that JP Morgan’s global bond indices presently account for a substantial US$ 213 billion worth of investments by global investors. It is reasonable to anticipate that a 10%weight allocation could translate to approximately US$ 21 billion.
Furthermore, Goldman Sachs has projected an influx of more than $40 billion over the next 18 months. The implications of this development can be viewed through three distinct lenses:
1. Deepening of the Bond Market: This development is highly favorable for individuals and institutions with fixed-income portfolios. Foreign investments in Indian bonds have been relatively modest, totaling around $3 billion in 2023. Consequently, an anticipated influx of approximately $40 billion over the next 18 months represents a substantial shift. Additionally, the inclusion of India in JP Morgan’s indices may prompt other leading index providers, such as Bloomberg and FTSE, to follow suit, further expanding the scope of foreign investment in the Indian bond market. It is noteworthy that the Indian government has been actively striving to deepen the country’s bond markets over recent years, evidenced by initiatives such as the launch of Bharat Bond ETFs for retail investors and the establishment of the RBI Retail Direct portal. The magnitude of foreign investments anticipated in the wake of this development can be instrumental in further maturing the Indian bond market.
2. Positive Spillover into Equity Markets: The positive implications extend beyond the fixed-income space. Banks in India are prominent investors in government bonds. The expected inflows resulting from the inclusion of Indian government bonds in JP Morgan’s indices can potentially drive up prices of Government Securities (G-Secs). This, in turn, stands to benefit banking institutions over the long term.
3. Support for the Rupee: Currency dynamics are also influenced by foreign investments. Inflows of dollars into India tend to strengthen the Indian rupee, while outflows have the opposite effect. With foreign investors poised to invest significantly in Indian government bonds, a corresponding inflow of dollars is anticipated. This has the potential to provide crucial support to the Indian currency, which carries implications for broader economic stability.
In conclusion, the inclusion of Indian government bonds in JP Morgan’s Emerging Markets bond indices represents a watershed moment in the international financial landscape. It not only signifies a remarkable step in the globalization of India’s financial markets but also holds the promise of substantial economic benefits, from the deepening of the bond market to positive spillover effects in the equity space and the reinforcement of the Indian rupee.
Financially rich vs. a rich life: |
Quote of the month
Doing well with money has a little to do with how smart you are and a lot to do with how you behave.
The proper financial mindset is to be scared enough to save for the short run and brave enough to invest for the long run.
– Morgan Housel, Partner, Collaborative Fund
From the global leaders:
India has highest growth potential in top economies – Billionaire investor Ray Dalio, founder, Bridgewater Associates (world’s biggest hedge fund)
Nomura upgrades India’s rating to overweight over strong macro
Our India growth exceeded expectation; impressed with govt’s approach on regulation: Salesforce CEO Marc Benioff
India’s High-Growth Companies Set It Apart: Julius Baer’s Mark Matthews
The Indian macro dataflow has continued to exhibit resilience and strength across various key indicators:
Manufacturing PMI: In September 2023, the Manufacturing Purchasing Managers’ Index (PMI) registered a value of 57.5. It remained within the expansion zone (>50) for the 27th consecutive month.
Services PMI: India’s services sector strengthened further in September, witnessing strongest output in 13 years. India’s services PMI stood at 61 in September, up from 60.1 in August. The reading was above the 50-mark separating growth from contraction for a 26th consecutive month.
GST Collection: September 2023 witnessed GST collections amounting to Rs. 1.62 trillion, reflecting an 10% year-on-year increase. This achievement marked the nineteenth consecutive month of collections surpassing the Rs. 1.4 trillion threshold.
Inflation: On the domestic economy front, the August CPI decreased to 6.83% from 7.44% in July 2023. In August, WPI inflation continued to remain in deflation, although its pace slowed, as it declined to -0.5% compared with -1.4% in July.
Foreign Exchange Reserves: India’s forex reserves drop for 4th week, fall to over 5-month low of $586.91 billion.
Trade Deficit: India being net importer of oil, high crude prices resulted in rupee depreciation & higher trade deficit. The trade deficit in August was $24.16 billion, almost 17% wider than July’s $20.67 billion gap.
Equity Market Overview:
In September, the tug of war between the bulls and the bears intensified after Nifty breached the 20,000 mark on 11th September.
The Nifty and the Sensex rose 2% and 1.5% respectively in the month.
Midcap outperformed the largecap indices registering 3.7% gains, while smallcap underperformed the largecap indices registering 1.1% gains
FIIs had been net buyers since March 2023 but turned major sellers in September with net selling of Rs. 14,768 cr (USD 1.77 Bn).
On the sectoral indices front, Power (+7.1%), Metal (+6.4%), Capital Goods (+5.6%), Oil & Gas (+3.1%), Auto (+3.1%), Realty (+3.1%) outperformed the indices while, Consumables (+1.8%), IT (+1.7%), Bankex (+1.6%), FMCG (+1.2%) underperformed the key indices during the month.
Mutual Funds’ Systematic Investment Plans (SIPs) achieved an unprecedented milestone, reaching Rs. 16,402 crore for the first time. This highlights the strong confidence Indian investors have in equities.
Fixed Income Landscape:
Indian bonds were relatively resilient as well, as the announcement of India’s inclusion in JP Morgan GBI-EM bond index helped offset the pressure from rising global yields.
Indian 10-year yields still moved higher by 5 bps for the month to end at 7.22% versus 7.16% a month ago.
Systematic liquidity continued to be in the deficit in line with reserve banks of India’s objective to ensure tighter front end of the curve. After a brief period of positive liquidity at the beginning of the month the deficit rose to a high of Rs. 1.5TN. The relief on account of I-CRR was negated by tax outflows.
Market Outlook:
Concerns have arisen regarding the ‘Goldilocks‘ narrative of the Indian economy due to the convergence of weak global indicators and a softening of domestic macroeconomic factors. In the context of economics, ‘Goldilocks‘ signifies a state in which a nation experiences a period of both ‘High Growth’ and ‘Low Inflation.’
Over the long term, it is plausible that India’s ‘Goldilocks’ story will remain resilient. However, in the immediate future, this may not be the case, primarily due to persistently high inflation and a potential softening of economic growth. Several factors contribute to this near-term uncertainty, including the rural-urban growth disparity, the impact of deficient rainfall on inflation and demand, the global economic slowdown affecting exports, and the influence of rising crude oil prices on external sector risks. Consequently, the near-term outlook for the ‘Goldilocks’ scenario appears uncertain.
Nevertheless, there are compelling reasons for optimism over the long term. These include a robust capital expenditure (capex) momentum, sustainable government revenues, healthy corporate profitability, a growing emphasis on indigenization, favorable demographic trends, and resilient bank balance sheets. As a result, the long-term economic perspective for India remains bright and clear.
