bond: Global bond play: With depth will come volatility, too

Mumbai: Foreign investors will welcome the depth and liquidity of the local market as India begins to feature on global bond indices, but once overseas ownership crosses a point, local dealers will have to contend with a new landscape of volatility that worldwide interconnectedness brings, a Bank of America trading veteran said.

Vikas Jain, head of India trading, fixed-income, currencies and commodities at Bank of America, said as foreign investment in Indian bonds heads toward the 10% weight on the JP Morgan bond index next year, the process of discretionary weighting changes would start to play out, creating a more complex trading environment.

“When investors decide to go overweight, they will go towards 12% of the index. When they go underweight, they will go to 8%. So, that 4% gap will regularly play out and that translates into an inflow or outflow of $10 billion-12 billion, which is a considerable number,” Jain said in an interview to ET.

“That will be driven not just by onshore factors. Offshore events also become very relevant in that situation…. so, it’s going to be volatile. It’s not going to be as smooth a ride as everybody is expecting it to be,” he said.

In September 2023, JP Morgan said that India would be included in its GBI-EM global index suite starting June 28, 2024, with the country’s bonds expected to reach a maximum weight of 10% in the GBI-EM Global Diversified Index. The inclusion of Indian government bonds will be staggered over a 10-month period from June 28 to March 31, 2025.Jain, who broadly expects foreign investment worth $2 billion to flow into Indian bonds every month starting June due to the JP Morgan index inclusion, expressed optimism about India being included in other global indices too.When asked about how local trading desks would deal with the radically new environment ahead, Jain said that the need of the hour was to onboard new FPIs (foreign portfolio investors).”There is a vast investor base which has opened up. Each firm will need to maximise on it and try to onboard as many clients as possible. There’s a very big opportunity for all of us. Investments in government securities are just the stepping stone,” he said.

“Once investors are comfortable with Gsecs, there are various other investment avenues which will open up such as corporate bonds. FPIs will definitely look to invest there too. Derivative market volumes will increase as well.” Jain, who believes that the Reserve Bank of India is in no hurry to cut rates, given firm economic growth, said that Indian government bonds were being buoyed, nonetheless, by favourable demand-supply dynamics.

With the announcement of index inclusion last year bringing in firm foreign flows into bonds since last year, the yield on the 10-year benchmark Indian government bond could head to 6.90% if US inflation throws up no rude shocks, Jain said.

“If US inflation eases even marginally from the projections then there is definitely room for the Indian 10-year bond to go towards 6.75% and lower,” he said.

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