India anticipates decade-high $2 billion bond inflows this month
India is preparing for a significant surge in foreign inflows into its bonds, expected to reach a decade-high of $2 billion around June 28. This anticipated influx is linked to the inclusion of Indian bonds in the JPMorgan Emerging Market Index, a widely tracked global benchmark. The estimate, provided by four bankers, is second only to the record-high $2.7 billion that flowed into Indian bonds on August 20, 2014.
JPMorgan index inclusion to boost India's bond market
The JPMorgan Emerging Market Index, which is tracked by over $200 billion in assets, will gradually assign a weight of 10% to India by March 2025. This implies that India could witness total passive inflows of at least $20 billion over the next 10 months. However, the Reserve Bank of India (RBI) is expected to absorb most of these Dollars to prevent a sudden rise in the value of the INR.
RBI's role in managing bond inflows
A source familiar with the RBI's plans stated, "It's just a case of inflows, this time in debt instead of equities." The source also suggested that these inflows could be positive for both INR and foreign exchange reserves. However, since INR's real effective exchange rate indicates it is moderately over-valued, the RBI is cautious about any significant appreciation.
Forex reserves to be boosted to prevent INR surge
Bankers anticipate that while front-running may boost INR slightly, a large rally is unlikely due to the central bank's control over the currency. The RBI has expressed its intention to continue boosting its forex reserves opportunistically to avoid a sudden surge in INR. Estimates regarding the timing of these debt index-related inflows are based on similar index adjustments in equity markets.
Foreign banks' response to anticipated bond inflows
In light of the anticipated inflows, large foreign banks may consider building short USD/INR positions. Despite these preparations, concerns persist. A senior banker at a large foreign bank warned, "all the pipes that have been put in place might not work." This indicates some apprehension in the market, about how well the infrastructure set up to handle these inflows, will perform under the pressure of such high volumes.
