Bond investors risk getting burned if India fails to enter global indices

Overseas investors are pouring into Indian bonds, putting the securities at risk of losses if a long-awaited inclusion into global indexes once again fails to take place.

Bond purchases by global funds under the so-called Fully Accessible Route jumped to 42 billion rupees ($529 million) in August, the most since January. They have already snapped  up an additional 31 billion rupees of the securities in September.

The inflows have added fuel to a bond rally driven by optimism that JPMorgan Chase & Co. will announce the inclusion of Indian debt in its emerging-markets index as early as the middle of this month. Any disappointment may damp sentiment and lead to a selloff, according to Quantum Asset Management Co.. 

India’s benchmark 10-year yields have dropped about 50 basis points from their June high of 7.62%, to close at 7.12% on Wednesday. In contrast, similar-maturity US Treasury yields jumped about 40 basis points since the end of that month. 

“The only thing driving the Indian bond market is the index-inclusion theme,” said Pankaj Pathak, a fixed-income fund manager at Quantum Asset in Mumbai. “If by any chance we don’t get that, I wouldn’t be surprised to see 10-year yields returning to 7.50%.”