Foreign Investments in Indian Govt Bonds Surpass $7.5B: More Gains Expected as JP Morgan Index Fuels FPI Surge

Mumbai: Foreign investments in Indian government bonds have surged since India’s inclusion in the JP Morgan bond index three months ago. Foreign portfolio investments (FPI) in fully accessible sovereign bonds have grown by about $7.5 billion, a figure on the higher end of market predictions. Experts believe this momentum will continue to rise.

Between June 27 and September 30, FPI investments in fully accessible Indian government bonds increased by ₹62,919 crore, or roughly $7.5 billion, reaching a total of ₹2.5 lakh crore. This growth followed India’s inclusion in the JP Morgan Emerging Market Index, which started on June 28. The bonds included in this index fall under the Fully Accessible Route (FAR) category.

Steady Inflows Expected

The current investment figures show an average monthly inflow of about $2.5 billion, which aligns with earlier market estimates of $2-2.5 billion per month due to the index inclusion. As the U.S. enters a monetary easing cycle, making emerging markets more attractive for investors, these inflows are expected to increase over the next three months.

“We anticipate monthly FPI inflows of about $2.5-3 billion this quarter,” said Parul Mittal Sinha, head of financial markets at Standard Chartered Bank, India and South Asia. She explained that foreign investors are adjusting their portfolios to increase their exposure to Asian emerging markets (EMs) and allocate more to EMs due to global interest rate cuts. “We foresee strong inflows into FAR securities, both in cash and through Total Return Swaps (TRS), with significant interest from index trackers and sovereign wealth funds.”

Impact on Bond Yields

This steady foreign demand has helped reduce domestic government bond yields. The yield on India’s 10-year benchmark government bond has dropped by 26 basis points, from 6.99% on June 27 to 6.73% as of Tuesday. Lower government bond yields reduce borrowing costs across the economy, as sovereign debt yields serve as pricing benchmarks for corporate debt.

Sinha predicts that the 10-year bond yield will fall further, reaching 6.60% by December and 6.40% by the end of the financial year. The continuous inflow of foreign funds – with the JP Morgan index inclusion process spread over 10 months – will also help strengthen India’s external balances. This is especially important now, as a slowdown in goods exports has pushed India’s current account balance into a deficit.