FPI's holdings are up by ₹16,990 crore since the inclusion of govt bonds in JP Morgan Index

Foreign Portfolio Investors (FPIs) are responding positively to the inclusion of Indian government bonds in JP Morgan. According to a report by SBI, the aggregate holding of FPI has increased by Rs 16,990 crore since June'24 and by Rs 95,687 crore since the announcement of bond inclusion by JPMorgan Chase & Co in October 2023.

The State Bank of India report released on Tuesday anticipates that the index inclusion of Indian bonds is expected to fetch investment of around USD 2 billion over the next 9 months. The report says this will boost demand for government papers, leading to lower yields and a greater and faster impact on short-end yields.

The report suggests that currently, 38 securities under FAR are eligible for inclusion in the JP Morgan Index and out of Rs 37 trillion, only 4.5 per cent is utilised, so there is significant headroom available even after accounting for the current holdings of FPIs.

The substantial foreign investment that is likely to come after inclusion in the indices will enhance the depth of the government bond market and support system liquidity. Adding to the observation, the report said that the FPI inflows will support liquidity and put downward pressure on yield.

The report further suggests that FPI inflows will supplement the Balance of payment (BoP) surplus, and add to forex reserves but no major change is expected in the rupee-dollar exchange rate.

For FY25 the current account deficit is expected at USD 36 billion, i.e. 0.9 per cent of GDP, with exports of goods at around USD 455 billion and imports at USD 708 billion.

The services exports, however, are expected to grow to USD 171 bn. Net FDI which dropped to the lowest level since 2007 in FY24 is expected to recover in FY25 to around USD 30 billion.

FII inflows, which are at USD 3.5 billion so far this fiscal, are expected to be around USD 25 billion, gaining the support of the debt inflows on account of bond inclusion. So far, USD 2.3 billion has come, and another USD 18 billion is expected.

However, the report underscored the cash crunch in the market. The Net liquidity was in deficit mode from 22 Apr'24 to 27 Jun'24 (except for 03 Jun'24 to 06 Jun'24, where it was in surplus mode with an average of Rs 0.4 lakh crore, mainly on account of month-end government spending) with an average deficit of Rs 1.1 lakh crore.

It came to surplus mode since 28 Jun'24 with an average of Rs 0.94 lakh crore till date.

Adding insights to the observations, the report added that the current cash crunch caused by the Just-In-Time (JIT) mechanism might ease with this increased liquidity.

This extra liquidity is expected to decrease over the years as the Reserve Bank of India (RBI) bonds mature, reducing the money supply.

The report cautions that additionally, any global events causing money to leave the country could make the Indian financial system more unstable.

The average supply of liquidity into the Indian Bonds by way of variable rate repo auction held in FY25 is Rs 1.3 lakh crore, and average absorption through variable rate reverse repo auction amounts to Rs 0.27 lakh crore, as per the SBI report.

Underscoring the significant role played by the RBI, the report added that the apex banks are actively managing liquidity through main and fine-tuning operations.

JP Morgan and Chase included the Indian government's bond in its Emerging Market (GBI-EM) on June 28, 2024. It is estimated that the inclusion will bring USD 20-25 billion of inflows into the Indian bond market. However, India's index-eligible bonds have already attracted USD 10 billion since the inclusion was announced in September last year.

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