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Morgan Stanley sees a "good chance" of JPMorgan including Indian government bonds in its index, and recommended going long on the 10-year benchmark bond yield.

"We now believe that there is a very good chance that JPM will announce the index inclusion of India's bond market in mid-September," strategists Min Dai and Madan Reddy said in a note.

"We recommend to position for a strong INR and lower

G-Sec yields tactically. We like to add a short EUR/INR limit order and long 10-year G-Secs, targeting 25bp lower from here."

The foreign brokerage said actual inflows could take nine to 12 months and will be seen only in June or September 2023.

India's 10-year benchmark bond yield was at 7.23%, while Indian rupee was at 79.80 per dollar.

Morgan Stanley expects rupee to perform relatively well in the region, outperforming other low-yielding global currencies, while it expects the 10-year bond yield to drop by 25 basis points.

"We assume that the monthly increase of FAR (Fully Accessible Route) list bonds is $10 billion in the next 12 months," the report said. "This would suggest that the eligible bonds would be about $360 billion in 2H23, making it the second-biggest bond market after China in the index," it added.

Bond purchases through FAR have no foreign investment cap.

Bond bulls got a boost last month, after the Financial Times reported that JPMorgan was speaking to large investors about adding India to its emerging markets index. Goldman Sachs had previously said it expects an inclusion in 2023, estimating inflows of $30 billion.

Further, Morgan Stanley said bond investors could position themselves before the actual inclusion, which could drive the rally for one or two months in advance, given a prospective $3 billion inflow every month.

These inflows would be support both the rupee and bonds, it added.

Over the medium term, Morgan Stanley expects bond market to attract $18.5 billion a year to push the foreign ownership to