Up to $40 billion! Foreign capital accelerates "sweeping" the Indian bond market

Inclusion of Indian Government Bonds in JPMorgan Chase Index Imminent, Accelerating Inflow of Foreign Capital, Taking the Lead in Layout.

According to media data on Wednesday, as of June 18th, global funds net purchased 73.5 billion Indian Rupees (881 million US dollars) of Indian government bonds this month, compared to around 52 billion Indian Rupees in May and a sell-off of 98.3 billion Indian Rupees in April.

Starting from June 28, 2024, JPMorgan Chase will include Indian government bonds in the JPMorgan Chase Government Bond - Emerging Markets Index.

Since the decision was announced in September last year, overseas investments in Indian sovereign bonds have surged by 10 billion US dollars.

Foreign Capital May Continue to "Sweep" the Indian Bond Market

JPMorgan Chase stated that the inclusion in this index could attract 20 to 25 billion US dollars of global funds into Indian bonds. With India set to be included in JPMorgan Chase's major emerging market index, the size of foreign holdings of Indian government bonds is expected to almost double in the next year, reaching 4.4% of outstanding debt.

Goldman Sachs previously predicted that India's inclusion in JPMorgan Chase's major emerging market index will stimulate over 40 billion US dollars of funds flowing into the country's bond market in the next 18 months.

So far this year, Indian government bonds have brought investors a return of 4.5%, second only to Argentina in emerging market bonds.

In February, Pictet Asian Local Currency Fund allocated 21% of its assets to India; in April, Fidelity Western Asset Asian Opportunities Fund listed India as the third largest investment target; on May 29th, S&P Global Ratings hinted at a possible upgrade of India's sovereign rating in the next two years.

In addition, Bloomberg previously announced that on January 31, 2025, it will include India's "Fully Accessible Route" (FAR) bonds in the Bloomberg Emerging Market Local Currency Government Bond Index. FTSE Russell is also considering including India in its fixed income index.

More Restrictions on Entry

However, foreign capital entering the Indian market still faces complex document requirements, tax obstacles, and other barriers. The interest income they receive from bonds may be subject to a maximum tax of 20%, plus capital gains tax. Indian authorities are working to reduce disclosure requirements for investors and speed up reporting times, but some are still adopting a wait-and-see attitude.

Fidelity International Fund Manager Paul Greer said:

In terms of setting up onshore bond accounts, India is undoubtedly one of the most difficult countries.

This has stimulated the growth of offshore investment tools, with some Indian domestic banks holding sovereign debt (government-issued bonds) and then providing contracts to foreign investors, allowing them to benefit from underlying Indian sovereign debt. For example, the issuance of such instruments by multilateral institutions such as the Asian Development Bank (ADB) and the World Bank has reached a record $3.7 billion this year.

With more and more foreign capital pouring into the Indian bond market, this also means that the country faces an increased risk of sudden capital outflows. In April, investors withdrew nearly 2 billion US dollars from the market speculating on a delay in US interest rate cuts. The Reserve Bank of India is aware of the possibility of increased volatility and has stated its readiness to draw funds from its $656 billion foreign exchange reserves to stabilize the currency