JP Morgan index impact: Foreign flows in Indian govt bonds cross $1 bn in two weeks

India’s inclusion in the JP Morgan Emerging Market Government Bond Index (GBI) on June 28, 2024, has catalysed a significant influx of foreign investment into Indian government bonds. The country was assigned a one per cent weight in the index.

In roughly two weeks since the inclusion, foreign portfolio investment (FPI) in fully accessible Indian government bonds increased by 8,738.83 crore or $1.04 billion, Economic Times reported citing analysis of data from Clearing Corporation of India (CCIL).

Since September 2023, when the inclusion was first announced, India has seen $11 billion in yield-influencing inflows.

Record-breaking forex reserves

The substantial increase in foreign investment has had a direct impact on India’s forex reserves, which hit a record high of $657 billion as of July 5, 2024, according to the Reserve Bank of India (RBI). This milestone underscores the growing confidence of foreign investors in the Indian economy and its financial markets.

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Investment in central govt securities

Data from The Clearing Corporation of India Ltd. provides further insight into the investment landscape for central government securities. The general category for these securities has an upper investment limit of Rs 2.68 lakh crore ($32.05 billion), out of which Rs 66,582.09 crore ($7.96 billion) has been invested.

An additional Rs 87 crore ($10.40 million) remains blocked but unutilised, bringing the total to Rs 66,669.09 crore ($7.97 billion). This results in a utilisation rate of 24.84 per cent.

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In the long-term investment category, the upper limit is Rs 1.37 lakh crore ($16.38 billion), with current investments totaling Rs 5,036.37 crore ($602.29 million), leading to a utilisation rate of just 3.66 per cent. These figures indicate substantial room for further investments, highlighting the untapped potential within the market.

Yield trends in G-Secs

The yield on the 10-year benchmark government security (G-sec; 7.10 per cent GS 2034) experienced a minor increase, opening June at 6.95 per cent and closing at 7.01 per cent, up 2 basis points from its May close of 6.99 per cent.

This slight rise in yield reflects the market’s response to the increased demand for Indian government bonds, according to CRISIL.

Implications for the future

The relatively low utilisation percentages in both general and long-term categories of central government securities suggest ample capacity for new investments. As foreign investors continue to increase their stakes in Indian government bonds, it is likely that the market will see further capital inflows.