India Sees Surge in Foreign Investments into Sovereign Bonds

India's sovereign bonds saw an influx of USD 403 million, following their inclusion in JPMorgan's emerging-market index. Morgan Stanley reports significant foreign interest in India's bond market, with new investments totaling USD 11 billion since September 2023. Local banks and insurance companies hold substantial G-Secs shares.

Overseas investments into India's sovereign bonds, also known as G-Secs, showed robust performance last week with an influx of USD 403 million. This surge followed the official addition of Indian government bonds to JPMorgan Chase & Co's benchmark emerging-market index, the Government Bond Index-Emerging Markets (GBI-EM), starting June 28.

Morgan Stanley reported that foreign portfolio investors have invested approximately USD 11 billion into the fully accessible route (FAR) bonds since the inclusion announcement in September 2023. Aside from one month, net inflows in India's debt markets have been consistently positive throughout 2024.

According to Morgan Stanley's analysis in its 'India Fixed Income Strategy' report, the bond market witnessed foreign inflows in six out of the seven months in 2024, contrasting with more mixed equity flows. The cumulative bond market inflows in 2024 mark the strongest trend in recent years, with 29 FAR government bonds now incorporated into global bond indices for emerging markets.

The report highlights the significant implications of this index inclusion for foreign investor interest and participation in India's bond markets. By 2024, foreign investors had added USD 7.1 billion into FAR bonds, raising foreign ownership of G-Secs to 2.6 per cent.

Morgan Stanley noted that local banks hold 40 per cent of G-Secs, while insurance companies and the Reserve Bank of India (RBI) hold 28 per cent and 13 per cent, respectively. The G-Secs supply pipeline is expected to remain robust, supported by the government's strategic debt consolidation through auctions and re-issuance operations.

JP Morgan previously stated that the inclusion followed substantive market reforms by the Indian government to facilitate foreign portfolio investments. This move underscores India's growing appeal to global investors, particularly as various global manufacturers consider investing in India as part of their post-pandemic diversification strategies.

JP Morgan projected that India would achieve a maximum 10 per cent weightage in the Government Bond Index-Emerging Markets by March 2025, with a staggered inclusion process starting June 2024.

Foreign investors are also showing increased interest in India's equity markets, with foreign portfolio investors often being net buyers in these markets.

(With inputs from agencies.)