Front-loaded, then flat: JPMorgan Index fails to sustain FAR bond inflows

Foreign inflows into India’s Fully Accessible Route (FAR) government bonds following the phased entry into JPMorgan’s GBI-EM index have fallen well short of projections so far.

 

When JPMorgan announced in September 2023 that Indian bonds would be phased into the index starting June 28, 2024, and reaching the full 10 per cent weighting by March 31, 2025, at 1 per cent per month, analysts predicted passive inflows of $20 billion - $25 billion, with bullish scenarios extending up to $30 billion, including active repositioning.

 

However, between June 2024 and March 2025, total foreign purchases under the FAR route had reached just ₹1.09 trillion, which is approximately $14 billion, representing a shortfall of 40–45 per cent against these passive inflow estimates and falling well below the generous upper range. This sizable gap reflects a muted market response, particularly when contrasted with the early optimism that greeted the index announcement.

 

 

Much of the inflow occurred in the months leading up to the actual inclusion between September 2023 and June 2024, net inflows stood at approximately ₹92,302 crore. This indicated significant front-loading by investors who anticipated the move and adjusted their portfolios ahead of schedule.

 

“Flows were lower than the originally estimated $20 billion –25 billion because US yields had risen during the inclusion phase, not just impacting India but other emerging markets as well. Initially, in the second half of FY25, US yields climbed due to growth exceptionalism. More recently, the rise has been driven by fiscal concerns, which, along with general risk-off sentiment, has led to continued outflows,” said Gaura Sen Gupta, chief economist, IDFC FIRST Bank.

 

 “Additionally, a large part of the inflows was front-loaded after the September 2023 announcement, as many foreign investors had already taken positions ahead of the formal inclusion starting June 2024. Since a significant chunk of flows had come in early, actual flows post-inclusion were understandably muted,” she added. 

 

Although some front-loading did occur in anticipation of formal inclusion with foreign investors increasing their holdings, this momentum did not sustain.

 

The period following March 2025, after the completion of the inclusion process, witnessed notable reversals. Data by the Clearing Corporation of India (CCIL) showed net outflows of ₹11,145 crore in April 2025, ₹12,317 crore in May, and ₹7,800 crore in June of the current year, cumulatively eroding over ₹31,000 crore (around $3.7 billion) in foreign investment. The sell-offs have been largely attributed to profit-booking and the volatility in rupee amid global interest rate jitters.

 

“The outflow was because the yield spread narrowed significantly to below 200 basis points. The US yield was rising during the global trade war situation and our yield was softening because of the RBI’s OMO (open market operation) purchases and liquidity infusion, along with the rate cut,” said a market participant.

 

“We will see some reversals because the outlook seems positive. US yield is falling and it will continue to fall if we see a rate cut in the US in July which seems very likely. Domestically, we will see the next rate cut only in October or December,” the person added.

 

FPIs’ holding of FAR securities remains elevated at ₹2.74 trillion or approximately 6.8 per cent of eligible issuance. Moreover, market participants said that supportive domestic policies, such as RBI interventions and promising macroeconomic data, strengthen the case for a rebound.

 

Further momentum may build as India gears up for its inclusion in FTSE Russell’s emerging market debt indices. FTSE has announced that Indian FAR bonds will be phased into its Emerging Markets Government Bond Index (EMGBI) starting September 2025, with the inclusion to be carried out in equal monthly tranches over a six-month period, concluding in February 2026.