Demand for longer-duration bonds likely to rise: ICICI Prudential Life

By Khushi Malhotra

Demand for India’s longer-duration bonds is likely to be supported from growth in pension funds and the upcoming index inclusion, according to one of the country’s largest insurers. 

The addition of India to JPMorgan Chase & Co.’s emerging markets bond index will provide a further fillip to the notes as 40% of the selected bonds have maturities of 15 years and above, Vidya Iyer, head of fixed income at ICICI Prudential Life Insurance Co., said in an interview on Bloomberg TV. 

“Given the kind of growth the real money domestic investors have seen year on year, given the kind of business these investors are in, the demand for long bonds is here to stay,” Iyer said.

Upon inclusion, Indian bonds will have the highest duration among the index members at 7.03 years, with yield-to-maturity at 7.09%, according to a recent JPMorgan note.

This is a modal window.The media could not be loaded, either because the server or network failed or because the format is not supported.

India’s index-eligible bonds have attracted over $10 billion since the inclusion was announced in September. This event could likely draw $20 billion to $25 billion of global flows into local debt, according to JPMorgan.

The market seems to be broadly positioned for India acquiring a 1% weighting in the index starting June 28, said Iyer. However, yields are set to head lower over the long run with structural forces at work, she added.

“India is in such a sweet spot, I truly believe that it will continue to remain a very preferred investment destination due to strong and stable macroeconomics, prudent fiscal policy by the government, proactive central bank, and very stable currency,” said Iyer, projecting an economic growth of 7.2%-7.5% in the current fiscal year. “It’s a perfect mix and that is why bonds have remained very well anchored.”

There isn’t much risk of large outflows following the addition to the index as foreign holdings in Indian bonds remain minuscule, Iyer said.