According to HSBC Asset Management, Indian bonds are expected to garner approximately $100 billion in foreign inflows in the future years, owing to the inclusion in global bond indexes.
While inclusion in global indexes may result in inflows of up to $50 billion, Shriram Ramanathan, chief investment officer of fixed income at HSBC Asset Management's India unit, predicted a similar amount of flows from large institutional investors, sovereign wealth funds, and pension funds in an interview.
India has become a favorite destination for Wall Street investors, drawn by one of the world's highest rates of economic growth and positioning itself as a viable alternative to China. Foreigners own only 2% of government bonds, demonstrating how global funds remain underinvested.
"India really stands out as a fairly attractive destination for a strategic allocation from various large institutional investors," Ramanathan added. "People start appreciating some of the nuances and the risk returns that it has delivered over the last five and 10 years which make it an extremely attractive proposition."
Monetary policy, inflation targeting, and fiscal policy have all contributed to the creation of credibility in recent years, laying the groundwork for India's economic performance in the years ahead, he said. HSBC's projections are consistent with other foreign banks' views on prospective flows into India's equities markets.
India's trillion-dollar government bond market is bracing for a surge in foreign investment as it prepares to join JPMorgan Chase & Co.'s emerging markets bond index in June.
Bloomberg Index Services Ltd., a competitor to global index providers, has started a consultation to gather comments on the planned inclusion of India's Fully Accessible Route, or FAR bonds, in its emerging market local currency index. FAR bonds are securities with no investment restrictions for foreigners.
Foreigners own roughly 2% of government bonds, making their ownership one of the lowest in emerging markets. Because of India's low correlation with global markets and other emerging countries, he believes it should be a stand-alone investment destination and component of EM allocations, comparable to China.
India's 10-year bond yield of 7.17 percent is the highest in emerging Asia. Local yields are "fairly attractive" and higher carry provide favorable diversification opportunities, which, together with economic stability, is "somewhat of a rarity in the world right now," he said.
