Statsguru: India's index inclusion may bring capital into the country

India’s inclusion in JP Morgan’s emerging market bond index, starting this week, is expected to bring capital into the country. Funds worth over $200 billion in assets track the index and are expected to result in over $20 billion flows into the country. During the inclusion period, 1 per cent weight will be added each month, starting June 28 and phased over 10 months, until March 31, 2025. Indian bonds, along with Chinese, Indonesian and Mexican bonds will have a 10 per cent weighting (chart 1).

Since May 2024, foreign investors have been net buyers in the debt market, even as they have been net sellers in the equity market over the last two months. Foreign flows into Indian debt have been rising of late with nearly $14 billion on a rolling 12-month basis (chart 2).

Institutions investing in Asian bonds have seen an increase in allocation towards Indian bonds before the inclusion, according to data from a May 2024 report by Morningstar. This includes funds investing in riskier high-yield bonds (chart 3).

Foreign ownership remains below permissible limits with only around a fourth of the total available space being utilised (chart 4).

Analysts expect inflows to structurally reduce the cost of capital in India, though it can come with greater volatility. The gap between US and Indian bond yields has been narrowing (chart 5). 

The lower cost of capital is expected to be a positive for pickup in investment. 

This comes at a time when new project announcements in India have been rising. It touched over Rs 29 trillion on a rolling four-quarter basis in March, which was one of the best quarters on record (chart 6).