Insurance CIO sees high institutional demand for Indian bonds

With the imminent inclusion of India in global bond indices, interest has soared from international and domestic institutional investors, the CIO of an Indian insurer said.
Insurance CIO sees high institutional demand for Indian bonds

Institutional investors, local and international, are eagerly snapping up India bonds as the market gears up for India’s inclusion in a global suite of bond indices, the chief investment officer at an Indian insurance company said.

"The upcoming inclusion in JP Morgan EMBIGD [JP Morgan EMBI Global Diversified Index] in June 2024 appears to be the key driver for the huge inflow in the debt market,” Ajit Banerjee, CIO of Hyderabad-headquartered Shriram Life Insurance, told AsianInvestor.

“Active foreign investors want to remain ahead of the game and have thus already started building up positions in the debt market.”

Foreign investors have flocked to the country’s debt markets this year, piling in about $2.7 billion in February, the highest monthly inflow in more than six years.

They have poured about $14.4 billion in India’s debt market in the 12 months ending March 2024 - the highest yearly inflows since 2015.

“Domestic institutional investors like insurance companies, pension funds, etc., are also investing quite heavily in debt and will continue to do so,” Banerjee said.

“There would no dearth of demand for Indian bonds going forward. On the contrary, there can be some supply related imbalances that might come our way next year and in future,” he added.

Shriram Life Insurance, a joint venture between India’s Shriram group and South Africa’s Sanlam group, has about $1.3 billion in assets under management (AUM).

Shriram group is an Indian non-banking financial services provider with about $34 billion in AUM.


Other experts have expressed similar optimism.

JP Morgan’s decision to include India in its global bond indices in 2024 will bring in billions of dollars of foreign fund flows, Sriram Iyer, CEO of India's HDFC Pension Management Company, told AsianInvestor previously.

“It will boost India’s bond market by bringing passive flows of $25-$30 billion between June 2024 and March 2025 and will support further development of domestic capital markets,” he told AsianInvestor at the time.

International asset managers have also been bulking up their Asian bond portfolios with Indian bonds.

Over the past three years, India's weighting in JACI (JP Morgan Asia Credit Index) has consistently hovered between 6% and 7%, while the average India allocation for funds within Morningstar's Asian bond fund category has climbed from 8% in 2021 to 10% in December 2023.

Similarly, within Morningstar's Asian high-yield funds category, the average India weighting in fund portfolios surged from 13% to 17% over the same period.

“Several funds within Morningstar’s local-currency Asia bond category have already begun positioning their portfolios to reflect the developments that are poised to enhance inflows into Indian sovereign bonds, potentially providing a tailwind for bond performance,” Arvind Subramanian, senior analyst, manager research at Morningstar, said in a recent note.

Interest in India's bond markets has soared in the past 12 months.
Image credit: Shutterstock


Still, transacting in Indian bonds is notably more complex than in other emerging market local currency bonds.

Unlike many other nations’ bonds, Indian debt is not euro clearable[via global securities clearing platform Euroclear], Nafez Zouk, emerging markets sovereign debt analyst at Aviva Investors said in a May note.

“From international investors’ standpoint, having to clear trades in India means they do not have the security of dealing with a third-party clearing house that is well known and trusted internationally.

“Clearing transactions in India also adds complexity as there is an extra layer of rules to abide by and the operating hours are different. That could be especially problematic for US managers, some of whom may have to employ extra staff just to be able to settle trades,” Zouk said.

A withholding tax of up to 20% on coupon payments and capital gains of foreign investors remains another barrier, added Zouk, noting that international investors could seek recompense in the form of higher yields or prefer similarly rated sovereign exposure with a lower tax burden.

These issues, however, might not deter international investors given a slowdown in other major economies and persistent interest rate uncertainty.

"Overall, the Indian economy’s fundamentals are looking very strong,” said Shriram Insurance’s Banerjee.

“The key macro indicators are looking positive and there isn’t much stress building up on the macro side at this point of time. The Indian economy remains much better placed than our western peers.”

India remains the fastest-growing economy and will continue to remain so in the near future as per IMF estimates, he noted.

“The forex reserves are adequate, enabling RBI to maintain a stable currency regime in the near future unless some extraordinary shocks are applied.”

India’s foreign exchange reserves hit a record high of $645 billion at the end of March, according to the Reserve Bank of India and is currently around similar levels.


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