Look who scooped up Indian bonds since the JP Morgan move

A large part of this increase is due to buying of sovereign debt, market veterans said.
A large part of this increase is due to buying of sovereign debt, market veterans said.


  • Between September and February, FPIs assets under custody (AUC) swelled by 77,379 crore.

MUMBAI : Foreign banks, sovereign wealth funds (SWFs), two categories of investment managers, and broker dealers gorged on Indian debt after JP Morgan Chase & Co. greenlit Indian government bonds for its emerging market index, depository data showed.

In September 2023, JP Morgan decided to add 23 Indian government bonds to its widely tracked emerging market debt index beginning 28 June 2024, paving the way for billions of dollars in investment inflows. However, bond investors appear to have flocked to them even before the decision took effect.


Between September and February, foreign portfolio investors’ (FPIs) assets under custody (AUC) swelled by 77,379 crore; of this, the categories above accounted for 55,943 crore or 72%, data from NSDL showed. The figures exclude hybrid debt and the voluntary retention route, where foreign investors must retain their investment proceeds for three years in India.

A large part of this increase is due to buying of sovereign debt, market veterans said. This is borne out by depository data showing that of the 3.34 trillion FPI debt assets under custody as of 29 February, 2.29 trillion or 69% was in sovereign debt, up from 61% as of September end.

According to a debt market participant, yields of public sector companies’ bonds used to be at a premium of 40 bps to bonds in the fully accessible route (FAR) category before covid. However, the premium has since shrunk to an unattractive 10 bps, reducing foreign investors’ appetite for corporate debt. The 10-year government bond now has a yield of 7.03%.

The FAR category includes securities that do not have any capping on holdings by foreign investors.

“Inclusion into the bond indices, strong macros and fiscal discipline are resulting in robust demand for Indian paper from foreign banks and SWFs, and this is likely to continue until the inclusion, at least," said Marzban Irani, CIO, fixed income, LIC Mutual Fund.

Interestingly, foreign banks accounted for the maximum increase of 379% in flows from September 2023 to February 2024, followed by designated investment managers (352%), SWFs (116%), broker-dealers and any entity whose investment manager is a category 1 FPI from a Financial Action Task Force (FATF) member country.

Category 1 FPI includes central banks, government agencies and multilateral organizations. The FATF, of which India is a member country, leads global action to tackle money laundering, terrorist and proliferation financing.

Fund veterans like A. Balasubramanian, MD of Aditya Birla Sun Life AMC, believe that some of the FPIs were buying the “fully accessible route" Indian bonds to “make a tidy profit" when passive trackers like debt ETFs and index funds begin to pump in an estimated $23 billion into these instruments from June onwards.

This implies that the price of the FAR bonds would rise as passive investors line up to buy the bonds over a 10-month period.

Another sentiment booster was financial news and data provider Bloomberg saying on Tuesday that it would include FAR bonds from January 2025 on its emerging market and related indices, which could attract flows of $3 billion.

“Apart from the JP Morgan index inclusion, investors bullish the Indian rupee could execute their view by buying the FAR bonds," said Jayesh Mehta, former country treasurer, Bank of America. He said that strong macros, with India being the fastest-growing economy among G20 countries, and maintaining fiscal discipline in the face of stable crude oil prices “boded well" for attracting incremental flows.

The largest holders of Indian debt assets as of February end include central banks ( 64,045 crore), regulated funds ( 54,722 crore), unregulated fund with Category 1 FPI investment manager ( 37,296 crore) and regulated bank ( 27,340 crore).

India’s economy is estimated to expand by 7.6% in FY24, against a 7% growth in the preceding fiscal year, thanks largely to a growth in indirect taxes and fall in subsidies.

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