Indian stock market. PTI.

Foreign investment in Indian government bonds grew sharply in the last three months of 2023, led by JPMorgan’s decision to incorporate the paper in its indexes, which lifted inflows to a six-year high.

According to clearing house data, foreign investors net acquired 350 billion rupees ($4.2 billion) in government bonds between October and December, raising the total amount purchased to 598 billion rupees, the highest amount since 2017.

Fund managers foresee an increase in inflows in 2019.

“We are positive on India into 2024 and also expect inflows into the local currency asset class,” Jean-Charles Sambor, Head Emerging Markets, Fixed Income at BNP Paribas Asset Management, said.

The Federal Reserve’s rate decreases combined with the containment of India’s inflation and fiscal concerns might drive the yield on the benchmark 10-year bond below 7%, according to Sambor.

JPMorgan declared in September that starting in June, certain Indian bonds will be included in its index suite and the Government Bond Index-Emerging Markets. Analysts predict that bonds will see additional inflows of about $25 billion as a result.

The yield on India’s benchmark 10-year bond was trading at 7.20% on Monday, following a 15 basis point decline in 2023. The demand for assets from developing markets was negatively impacted by central banks’ tightening of monetary policy last year, which caused the yield to soar.

Now, the Fed has indicated it is ready to cut interest rates in 2024 and many expect the Reserve Bank of India (RBI) to follow suit.

“Foreign inflows in bonds should continue due to (index) inclusion and could see a boost if the Federal Reserve cuts rates aggressively, as that will enhance the yield differentials,” Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies, said.

Holland expects the Fed to cut rates by 100 basis points-150 basis points in 2024 and the RBI to lower rates by at least 50 basis points.

The US 10-year bond yield has fallen to around 3.85% on rate cut hopes, widening the spread with its Indian peer to 335 basis points from around 240 bps in late October.

Indian bonds under the so-called fully accessible route received the bulk of flows late last year, with foreign holdings in them more than doubling from a year earlier to 1.3 trillion rupees, clearing house data showed.

($1 = 83.1600 Indian rupees)