Redefining Cash Returns: India's Government Bonds – The 7.2% Yield Game-Changer

In the realm of fixed income instruments, Indian Government Bonds have emerged as a compelling alternative to traditional cash instruments, such as bank deposits and money market instruments. With a yield of 7.20% in INR for the 10-year bond, India offers one of the highest yields among major markets, making it an attractive proposition for discerning investors.

Market Liquidity and Size. India boasts the second-largest Emerging Market (EM) bond market after China, with an outstanding total size of Government Issued Securities at a staggering US$1.2 trillion (INR 98 trillion). Such liquidity ensures that investors can enter and exit positions with ease, a critical factor for institutional investors.

Inclusion in JP Morgan GBI-EM Indices in June 2024. The prospective inclusion of Indian Government Bonds into the JP Morgan GBI-EM indices could usher in approximately US$30-40 billion of inflows over the forthcoming 18 months. Such a move would not only support the Indian currency but also mitigate potential currency depreciation and volatility.

Key Highlights:

• Credit Ratings: Investment grade ratings from leading agencies: S&P BBB-, Moody’s Baa3, and FITCH BBB.
• FX Reserves: India holds the 4th largest FX Reserves globally, amounting to USD 584 billion, ensuring currency stability.
• Ownership: A mere 30% of GBI-EM investors currently have exposure to India, indicating significant potential for growth.
• Economic Outlook: India stands as a beacon of macro and political stability, with a projected GDP growth rate of 6% to 7% for 2023-2028. The nation’s focus on reforms and macro-stability underpins robust capital expenditure and corporate earnings growth.

Future Projections: We anticipate the 10-year yield to hover within the 7-7.20% range in the upcoming 6-12 months, with a potential dip below 7% within the 12–24-month horizon. The inclusion of India’s Fully Accessible Route (FAR) Government Bonds in the JP Morgan GBI-EM Global Diversified Index from June 28, 2024, with a phased weight increase, could result in inflows of roughly US$3 billion each month for a period of 10 months. This influx would be beneficial for both Government Bond prices and the INR.

Investment Avenues: For international institutional investors keen on capitalizing on this opportunity, there are two primary routes:

1. Direct Investment: Acquire the bonds directly in the Indian market. This requires a Foreign Portfolio Investor (FPI) license, with the KYC process lasting up to two months. This route is ideal for those looking for a strategic foothold in the Indian markets. This route is advisable for USD 100 mil+ investments.
2. ETFs: A more streamlined approach is available through ETFs traded in USD on European Exchanges. Given the liquidity of the underlying instruments, market makers can readily provide liquidity for $10-50 mil tickets.

Conclusion: While the prospects of Indian Government Bonds are undeniably promising, investors must remain cognizant of potential risks, such as rising crude oil prices and elevated US treasury yields. Nevertheless, with a balanced approach and a keen understanding of the market dynamics, Indian Government Bonds can serve as a valuable addition to an institutional investor’s portfolio, offering both stability and attractive returns. For those interested in capitalizing on this opportunity, please ask for our Indian Government Bond basket to explore curated investment options tailored to your needs.