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Citi, Bank of America see India`s 10-yr bond yield sub-7% post index inclusion
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JPMorgan's decision to include local Indian bonds in its widely tracked emerging market debt index could boost demand for debt and push India's benchmark 10-year bond yield to sub-7% levels in the coming months, Citi and Bank of America said on Friday.
The 10-year benchmark 7.18% 2033 bond yield dropped seven basis points (bps) to 7.0717% in early trades on Friday, the lowest for the 10-year yield since July 27, compared to its previous close of 7.1443%. It was last at 7.1214%.
India's local bonds will be included in the Government Bond Index-Emerging Markets (GBI-EM) index and the index suite, benchmarked by about $236 billion in global funds, according to JPMorgan, paving the way for more foreign inflows in the country's debt market.
"We continue to expect the 10-year India bond yield to ease down to 6.80% over the coming months," Citi analysts wrote in a note.
The inclusion should help improve sentiment around India's bond market, "which has, on its own, been very resilient in the context of the selloff witnessed in the global fixed income markets in recent months," said Citi.
Jayesh Mehta, India country treasurer at Bank of America, sees the 10-year yield to drop towards 6.90-6.95%, on "favourable" demand supply dynamics, especially due to demand from insurance companies.
"I see the government bond yields to be always constructive, unless, of course, there is a negative surprise on the macros," said Mehta.
While Mehta estimates the inclusion will bring in debt inflows of up to $35 billion into India by 2026, Citi expects foreign inflows of $22-23 billion over the 10-month period starting June 2024.
The announcement should also drive expectations of inclusion announcements from other index managers such as the Bloomberg Barclays Global Aggregate Index, Citi said, adding that demand from active investors and positioning from banks generally begins before the actual inclusion is effective.
Morgan Stanley said it expects investors to pre-position themselves before the index inclusion in June 2024 and expects the 10-year government bond to outperform.
The investment bank likes long 10-year bonds outright, without hedging foreign exchange risks, it said in a note.
