Edelweiss Asset Management Company (AMC) expects increased demand and favorable market conditions for Indian Government Bonds (IGBs) over the medium term at current levels.
A research note of the mutual fund house said the inclusion of IGBs in JP Morgan global bond indices - Emerging Markets (GBI-EM) is likely to attract more flows to these bonds, primarily due to the lower correlation of IGBs with other emerging market and global bonds.
Foreign portfolio investors (FPIs) are expected to be drawn to IGBs for their relatively higher yields and better secondary market liquidity, it said.
According to the note, the bond market anticipates rate cuts by central banks in developed and emerging economies from the July-September 2024 quarter.
Edelweiss AMC recommended 10 to 14-year Fully Accessible Route (FAR ) eligible IGBs for their superior risk-reward trade-off.
While the positive outlook for IGBs is prevalent, the report acknowledged potential risks that could impact it.
These include a sustained increase in US Treasury (UST) yields and elevated crude oil prices, which may affect market flows and the benign inflation outlook for India.
On potential tax incentives for GBI-EM, the report clarified that the Government of India has not offered any additional tax sops to foreign investors.
The trading of IGBs by Foreign Portfolio Investment (FPI) will be conducted in India and settled within the country.
All FAR-designated IGBs which matures after December 31, 2026 will be eligible in the index. This amounts to about Rs. 28 trillion worth of IGBs eligible for index inclusion as on September 20, 2023.
JP Morgan global bond indices account for USD 213 billion worth of investments by global investors. A 10 per cent weightage for IGB should attract US 21 billion dollars (Rs. 1.7 trillion) worth of investments in IGB by March 31, 2025 assuming investors have zero weight as of now and would like to be index neutral, Edelweiss said.
Index inclusion by JP Morgan may nudge other EM index providers like Bloomberg, FTSE and others which will result in additional inflows in the economy, the research added.
The Association of Mutual Funds of India on Friday welcomed the decision of global financial major JP Morgan to include government bonds in its benchmark Emerging Market Index from next year, saying it will result in more demand for government securities.
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