Investors on edge for $24 billion of inflows bond inclusion due to limited FPI involvement

In June, Indian bonds will join JPMorgan’s global index, raising concerns about potential volatility due to unpredictable foreign portfolio investment (FPI) flows. However, a senior finance ministry official has downplayed these fears, noting that foreign investment under the fully accessible route (FAR) remains modest.

According to Clearing Corporation of India (CCI) data, investments under the FAR route reached Rs 1.63 lakh crore as of May 20. The Reserve Bank of India introduced the FAR in April 2020, allowing non-residents to invest in specified government bonds without restrictions.

“The bond market typically attracts long-term investors. Even though the FAR route imposes no limits on FPIs, foreign investments haven’t yet reached the overall 6 percent ceiling for government securities,” the official stated. The 6 percent ceiling excludes investments under the FAR route.

The official also highlighted that “tighter liquidity conditions will make any volatility from the inclusion gradual. In the short term, there’s little to worry about, and the RBI has tools to manage any sudden outflows.” A recent Bloomberg report noted that India’s substantial foreign exchange reserves would be the first line of defense against market volatility from the anticipated inflows due to the index inclusion.

In September 2023, JPMorgan announced that eligible Indian bonds would be added to its GBI-EM Global Diversified Index starting June 28, 2024, eventually reaching a 10 percent cap by increasing at 1 percent per month over ten months until March 31, 2025. Bloomberg Index Services will also add Indian sovereign debt to its Emerging Market Local Currency Government Index starting January 31, 2025.

While the government welcomes this move, it remains cautious about its impact on domestic markets. Chief Economic Adviser V Anantha Nageswaran noted in September 2023 that the government must monitor foreign investor sentiments regarding domestic policy since even unrelated developments could affect local markets. Economists estimate JPMorgan’s addition alone could bring $24 billion in inflows over ten months. Despite seeing global bond index investors as long-term and stable, Indian authorities remain concerned about the effects of sudden large outflows on financial markets.

The senior finance ministry official questioned whether bond market inflows could be considered “hot money,” given the low level of FPI investments in FAR securities. In September 2023, foreign portfolio investors held only 2.5 percent of the Rs 28.5 lakh crore worth of FAR securities.

Christian de Guzman, senior vice president at Moody’s Ratings, told Bloomberg on May 20 that India’s economy could smoothly absorb large inflows following the inclusion of Indian bonds in global indices.