“Inclusion in the JP Morgan bond index will mean that the flows from there are view agnostic. So whether rates are going up or down, we will see the flows come in. Quite apart from that will be the monetary policy moving from a tight monetary policy to a much easier monetary policy. It looks like next year these are the two major events we need to watch out for in 2024.”
The RBI Governor is right to be wary of Indian bonds being included in a JPMorgan bond index from the middle of next year. As a double-edged sword, its risks require close consideration.
The inclusion of Indian government bonds in JPMorgan s emerging market bond index is expected to have a significant impact on the bond market and debt mutual funds. The inclusion will attract global passive debt flows into India, potentially leading to better demand-supply balance and lower yields for Indian government bonds. This, coupled with expectations of large foreign institutional investor inflows, could result in increased attractiveness of debt funds. However, the future rate hike trajectory is uncertain, as it depends on economic conditions and data-driven decisions by the US Federal Reserve.
Foreign investors currently hold less than 2% of government securities. Officials have in the past worried about the consequences of outsized debt inflows, leaving local banks and mutual funds as the main buyers of bonds.
See from this particular development you will see some moderation in bond yields and PSU banks are ones which are typically loaded more with the G6 and their SLR ratios are invariably higher in the banking system and they will likely benefit therefore from the moderation in bond yields.