Indian G-sec Bonds in JP Morgan: yields to touch 7% in FY 24, says SBI
The inclusion of Indian Government Bonds will commence on June 28, 2024, with India being allocated a maximum weight of 10% on the index.
Following the inclusion of Indian Government bonds into JP Morgan’s Emerging-market Index, yields could touch 7% even before March of the current fiscal and should affirmatively breach 7% in FY25, according to the State Bank of India.
“We believe yields could touch 7% even before March of the current fiscal and should affirmatively breach 7% in FY25……Demand for G-sec could now outstrip Supply of G-sec…This could be a new turning point in the G-sec market in India where supply has traditionally outstripped demand for G-sec,” SBI stated in its Ecowrap report.
India’s weight is expected to reach the maximum threshold of 10% in the GBI-EM Global Diversified and approximately 8.7% in the GBI-EM Global index, the State Bank of India said in its Ecowrap report. This is likely to result in passive flows of around $24 billion based on the current AUM/holdings by March 25.
JP Morgan Chase, the largest commercial bank in the USA, announced on September 21 (US timings) that it will be incorporating Indian Government Bonds (IGBs) into its benchmark, the Emerging-market Index Global Diversified (GBI-EMGD).
The inclusion of Indian Government Bonds will commence on June 28, 2024, with India being allocated a maximum weight of 10% on the index. JP Morgan revealed that 23I GBs, collectively valued at $330 billion, meet the eligibility criteria for inclusion. These bonds are categorized as “fully accessible” for non-residents. As of August 31, the GBI-EMGD had benchmarked Assets Under Management (AUM) of $236 billion.
In a parallel development, FTSE Russell, another major index provider, is also considering the inclusion of Indian bonds in its emerging market gauge, said SBI. Notably, the FTSE Emerging Markets Government Bond Index-Capped (EMGBI-Capped) oversees a substantial AUM of $1,477 billion as of the end of August, making it more than six times larger than JPM GBI-EMGD. If the inclusion process at JPM GBI-EMGD proves successful, it could pave the way for an even larger inclusion by mid-2025, the report added.
SBI believes that the decision to opt for the JPM GBI EM index by the Government of India and the Reserve Bank of India (RBI) could be a strategic move aimed at ensuring a natural progression of future developments, allowing for organic evolution and maturity to mitigate potential challenges. Additionally, when factoring in the third index, the Bloomberg Barclays EM bond index, the inflow of funds is expected to increase significantly.
“The total net G-Sec supply is expected at Rs 12.3 lakh crore in FY25, along with SDL demand of around Rs 6.0 lakh crore and T-bill of Rs 50,000 crore. After considering the demand for securities by various players, the gap is expected to be around Rs 2 trillion / ~$ 24 billion,” said SBI.
This matches with the likely India weightage in the JPM Bond Index by March’25 but a lot should depend on ironing out the potential areas of conflict resolution along with taxation in settlement for willing investors. The additional demand for G-sec owing to inclusion in the JPM Bond Index will likely shift the domestic demand towards the SDL & T-bills, thereby affecting the yield, as per the report.
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