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India is likely to welcome billions of dollars of foreign inflows if JPMorgan adds the country’s sovereign debt to its emerging markets index on Friday, a move that some analysts say will make the country more vulnerable to fickle flows of hot money.
India’s inclusion marks the first time the bonds of the world’s fastest-growing major economy have been included in a major benchmark and is the latest move to open up a once-closed market. Only in 2020 did India lift restrictions on foreign ownership on some rupee-denominated debt.
The inclusion of 28 government bonds worth more than $400 billion will give India a 10 percent share in the widely followed measure, according to JPMorgan.
About $11 billion has flowed into Indian bonds as investors position themselves ahead of the formal drawdown, according to Goldman Sachs. The bank expects another $30 billion to be added as the bonds are gradually included in the index over the next 10 months, raising foreign ownership from about 2 percent to about 5 percent.
The accession caps years of negotiations between the Indian government, banks and investors, during which the country relaxed some burdensome administrative controls and improved the tradability of bonds.
“Sentiment about that is quite high,” said Carlos Carranza, portfolio manager at Allianz Global Investors, which has been buying Indian government bonds. “It’s now on every investor’s radar and perhaps before this inclusion there wasn’t even a reason to look at it given the capital controls.”
India is expected to be one of the fastest growing economies in the world this year, with the United Nations predicting 7 percent growth.
The yield on the country’s 10-year government bond has fallen 0.19 percentage points so far this year to 6.98 percent, due to rising prices. But many funds are still likely to overcome complex bureaucratic barriers to market access.
“There is a perception that investors have already directed the flows, but we often disagree with that,” Carranza added. “Many investors in the sector need to open their accounts to trade Indian bonds. . . In my experience, those processes take time.”
The addition comes weeks after Prime Minister Narendra Modi, praised by investors for market-friendly reforms, became dependent on coalition partners after his Bharatiya Janata Party lost its parliamentary majority. The shocking election result initially caused a spike in Indian interest rates and a drop in stock prices, but the impact proved short-lived.
“There was a lot of nervousness about the outcome,” said Madhavi Arora, chief economist at Emkay Global Financial Services in Mumbai. “People moved on from there.”
S&P Global said in May it expected broad economic continuity regardless of the election outcome. The company announced that it is considering raising India’s triple B-minus credit rating.
Modi remains “obsessed with fiscal targets. . . he really wants India to be upgraded by companies like S&P,” Arora said. India “still offers a good return premium compared to its peers and there is a growth story: inflation looks good,” she added.
With Russia removed from the JPMorgan index following the invasion of Ukraine and the weakening Chinese economy, India could also be added to other fixed income benchmarks, said Gaurav Narain, manager of the India Capital Growth Fund in Mumbai.
Indian bonds will be included in the Bloomberg Emerging Market Local Currency Government Index from January, while the country’s sovereign debt is examined by Britain’s FTSE Russell.
However, fast-moving flows could complicate the Indian central bank’s efforts to control market volatility. Arora said foreign investors “may see the wind turning and withdraw”.
The Reserve Bank of India has downplayed these concerns. Earlier this month, Governor Shaktikanta Das said there was “no need to worry” about the central bank’s ability to cope with the ebbs and flows. “We have done it in the past and we will do it this time,” he said.
Analysts and fund managers view India’s foreign reserves of over $650 billion as sufficient ammunition to keep the rupee stable.
“There will undoubtedly be more volatility as India becomes even more integrated with global markets,” Narain said. “Currently, reserves appear sufficient and will only increase with this inclusion.”