Government securities and FX markets were pleased with India’s inclusion in the J.P. Morgan Global Bond Index – Emerging Markets, but gains were limited in both markets due to expected index flow structure and broader market sentiment.
Market participants hailed the move as beneficial for the Indian currency market as it will bring a new set of investors to the market. The fact that it is an index fund or a passive fund will ensure regular flow of foreign capital, unlike the FPI limit which remains underutilized at around 15% due to the need for active management.
The inclusion will be done in a phased manner over 10 months starting June 2024 and is expected to support government bond and rupee markets.
JPMorgan index funds could bring in $2-2.5 billion a month
“The J.P. Morgan index funds have approximately $216 billion in assets, so 10% equates to approximately $2-2.5 billion per month. The money will flow in in a staggered fashion starting in June 2024. This is very important to our market. It is not a very disruptive flow as the government borrows about $15 billion every month, which makes the total monthly supply included in the index about 15% of demand.” Gopal, Head of Treasury and Capital Markets, Jana Small Finance Bank Tripathi said.
Government bond prices rose on the news, but Friday’s deadline for a 33,000-crore treasury bond auction was lower than expected, erasing gains as market participants refrained from bidding aggressively in anticipation of further gains in U.S. Treasury yields and crude oil prices . .
“In the short term, we expect bond yields and the Indian rupee to reverse gains and track global markets after the initial euphoria. However, by the end of March 2024, the trend will reverse again in favor of bonds, with 10-year Treasury yields will be well below 7%. For the second half of FY24, we expect USD/INR in the range of 82.25-84.25,” Emkay Global Financial said in a note.
The 2033 10-year benchmark bond, with an interest rate of 7.26%, closed at Rs 100.47, yielding 7.19%, compared with Thursday’s close of Rs 100.63, yielding 7.17%. The 2033 bond, which yields 7.18%, also closed up 2 basis points.
The impact will be much weaker
On the other hand, the Indian rupee opened sharply higher on Friday but gave back some of its gains as some banks accelerated buying on behalf of oil marketing companies in the second half.
The rupee broke its five-day streak of falling below 83 rupees against the US dollar. It closed at 82.93 to the dollar on Friday, up from 83.09 to the dollar on Thursday.
However, others believe that the market impact will be much smaller as most of the impact has already been taken into account and the future trajectory will be dominated by macro and fundamentals.
“As flows along this route will begin in June 2024, the impact on bond yields is currently negligible and the direction of yields will be guided by other factors. By the end of fiscal 2024, the 10-year benchmark yield is expected to It closed between 7.20-7.40%,” Tripathi said.