JP Morgan Index Inclusion To Revolutionise Indian Debt Market: Know Major Movers, Expert Take On Which Fixed Income Instruments To Invest

The Indian bond market is set for a huge transformation this June with the inclusion of Indian government bonds in the JP Morgan Government Bond Index - Emerging Markets (GBI-EM). Experts predict that the increased global visibility will increase the attractiveness of the bonds leading to around USD 25 billion worth of passive inflow into the Indian debt market. For retail investors, this development offers huge opportunities but they should be mindful of larger factors influencing the market and which tenure of instruments are suited for them.

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Expert Take on Which Tenures To Consider

Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, said, "The inclusion of Indian bonds in the JP Morgan Bond Index is expected to attract significant foreign investment. Increased foreign inflows can lead to a reduction in bond yields due to higher demand for Indian debt securities."

A decrease in government T-Bill borrowing and record dividends paid by RBI to the Government of India are other factors pushing down bond yields. When rates fall, existing bond prices typically rise, and yields on new bonds decrease.

"Given the current global uncertainties and potential rate cuts by the RBI, short to medium-term bonds with one to 3 years tenure are safer. They offer a balance between yield and risk, allowing investors to reinvest at potentially higher rates if the interest rate cycle reverses," Srinivasan said.

He feels with India's inflation currently under control, bond yields might stay stable or slightly decrease if RBI does moderate rate cuts, but all this depends on global economic conditions.

So, the short to medium-term bonds are opportune with them being less sensitive to interest rate changes, thus reducing volatility. "Invest in a mix of short to medium-term bonds to balance yield and risk. Diversify across sectors and issuers to reduce exposure to any single entity's credit risk," Srinivasan said.

Srinivasan has a risky outlook on Long-Term Bonds above 5 years and suggests investors invest in them if they are confident in a stable or declining interest rate scenario. Although they offer higher yields, they are more sensitive to rate changes and can lead to significant price volatility. They are suitable for investors with a higher risk appetite and a long-term investment horizon, willing to withstand interim price fluctuations.

"Bonds with lower credit ratings (AA- to BBB) typically offer higher yields but with higher risks. Till the next two years, their yields may remain volatile, driven by investor demand and the issuer's financial health. Given the structured nature of many BFSI sector bonds, with monthly interest and principal payments, these can provide steady cash flow provided the issuer is in good financial health and the regulatory environment does not impact adversely," he said.

Cues For Investors For the Future

Over a longer horizon of 3 to 5 years, bond yields will be influenced by the broader economic environment, inflation trends, and interest rate cycles, Srinivasan said.

Investors should continuously monitor economic indicators, RBI policies, and global economic conditions to make informed decisions. In the short term, the Lok Sabha election results and subsequent RBI monetary policy will directly impact the debt markets, Srinivasan said. Political stability and dovish RBI policy can positively impact bond yields.

In the medium term, the upcoming budget session will provide clarity on government borrowing and fiscal policies, which will affect market sentiment. A disciplined fiscal approach is favourable for bond markets. Further, the Fed meeting, anticipated inflows from JP Morgan Bond Index inclusion, and movement in US Treasury yields will significantly impact capital flows and yield dynamics.