Govt Bonds To Bring In $2 Bn Monthly Inflow For Next 9 Months: SBI

The index inclusion of Indian bonds by JP Morgan is expected to bring in monthly inflows of around USD 2 billion for the next nine months, which is likely to boost the demand for government papers, as per a report by the State Bank of India (SBI). 

The aggregate holding of Foreign Portfolio Investors (FPIs) increased by Rs 16,990 crore since June 2024 and by Rs 95,687 crore since the announcement of bond inclusion by JP Morgan Chase to its Government Bond Index- Emerging-market Index Global Diversified (GBI-EM GD) index in October 2023.

The report revealed that currently, 38 securities under the fully accessible route (Far) are eligible for inclusion in JP Morgan index. Out of Rs 37 trillion, only 4.5 per cent is utilised, indicating significant headroom is still available even after accounting for current FPI holdings.

The FPI inflows will not only supplement the balance of payment (BoP) surplus but will also add to forex reserves.  It will also enhance the depth of the government bond market and support system liquidity, as per the report.

The current account deficit for FY25 is likely to remain at USD 36 billion (0.9 per cent of GDP), with exports of goods at around USD 455 billion and imports at USD 708 billion. The services exports are likely to grow by USD 171 billion.

Foreign Institutional Investors (FII) inflows, USD 3.5 billion in this fiscal so far, are expected to be around USD 25 billion, getting support through the debt inflows on account of bond inclusion. USD 18 billion is expected as USD 2.3 billion has come so far.

The current cash crunch caused by the just-in-time (JIT) mechanism might ease with increased liquidity. The net liquidity came to surplus mode since 28 June 2024 with an average of Rs 0.94 lakh crore till date, the report added. However, this extra liquidity is expected to decrease over the years as the Reserve Bank of India (RBI) bonds mature. 

The average supply of liquidity into Indian bonds by way of variable rate repo auction held in FY25 is Rs 1.3 lakh crore, as per the SBI report.

JP Morgan and Chase included the Indian government’s bond in its Index on 28 June 2024. The inclusion is expected to bring in USD 20 to 25 billion of inflows into the Indian market. The country’s index-eligible bonds have already attracted USD 10 billion since the announcement.