India is set to lure billions of dollars more inflows when JPMorgan Chase & Co. adds the nation's government bonds to its emerging markets index on Friday, opening up a $1.3 trillion market to a broader range of investors.
Global funds have already poured close to $11 billion into index-eligible bonds since JPMorgan's announcement in September. The US bank expects $20 billion to $25 billion to come in over the next 10 months, raising foreign ownership to 4.4 per cent from 2.5 per cent currently.
India's debt has become a favorite among emerging market investors, attracted to the nation's robust economic growth and a stable currency, which comes courtesy of the central bank. Both sovereign and corporate notes are headed for a sixth straight quarter of foreign inflows, a streak last seen 11 years ago, data compiled by Bloomberg show.
"Most of the flows we're seeing are driven by investors who are tracking the index and should be fairly sticky," said Vikas Jain, head of India fixed income, currencies and commodities trading at Bank of America Corp. "Declining debt-to-GDP ratio, stable macros and favorable demand-supply for India's bonds are positive factors."
For global investors, Indian bonds offers access to a high-growth, high-yield market. The nation's sovereign debt has outperformed its index counterparts over the past decade, according to JPMorgan.
Indian government debt is Asia's top performing so far this year, returning 5.3 per cent compared to a 1.3 per cent gain in Indonesian local currency bonds, according to data compiled by Bloomberg.
Within the so-called Fully Accessible Route bonds eligible for index inclusion, 28 securities worth more than $400 billion will give India a 10 per cent share in the index at peak. That's a similar weighting to China.
"India's relatively high yields among the other index constituents can potentially convince active managers to shift to overweight stance for these papers," DBS Group Holdings Senior Economist Radhika Rao wrote. Positive real yields, low volatility in the currency and a supportive economic backdrop are factors that make Indian government bonds "attractive for investors," she said.
