India's government bonds are on the verge of being included in the J.P. Morgan index, prompting a surge of foreign capital rushing in to take advantage of the situation and make early moves.

According to media data on Wednesday, as of June 18, global funds have net purchased 73.5 billion rupees ($881 million) worth of Indian government bonds this month, compared to about 52 billion rupees in May, and a sale of 98.3 billion rupees in April.

J.P. Morgan will include Indian government bonds in the J.P. Morgan Government Bond-Emerging Markets Index starting from June 28, 2024.

Since the decision was announced in September last year, overseas investment in Indian sovereign bonds has climbed by $10 billion.

Foreign capital may continue to "sweep" the Indian bond market.

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J.P. Morgan has indicated that inclusion in the index could attract between $20 billion and $25 billion of global funds to flow into Indian bonds. With India's imminent inclusion in J.P. Morgan's main emerging market index, the scale of foreign holdings of Indian government bonds is expected to almost double over the next year, reaching 4.4% of the outstanding debt.

Goldman Sachs previously predicted that India's inclusion in J.P. Morgan's main emerging market index would stimulate over $40 billion in inflows into the country's bond market over the next 18 months.

So far this year, Indian government bonds have delivered a 4.5% return for investors, second only to Argentina among emerging market bonds.

In February, the Pictet Asian Currency Fund allocated 21% of its assets to India; in April, the Fidelity West Asset Asia Opportunities Fund listed India as its third-largest investment target; on May 29, S&P Global Ratings hinted at a possible upgrade of India's sovereign rating over the next two years.

Furthermore, Bloomberg previously announced that it will include India's "fully accessible route" FAR bonds in the Bloomberg Emerging Markets Local Currency Government Bond Index on January 31, 2025. FTSE Russell is also considering including India in its fixed income index.Entering with many restrictions

However, foreign capital still faces complex document requirements, tax barriers, and other obstacles when entering the Indian market. The interest income they receive from bonds could be taxed up to 20%, plus capital gains tax. Indian authorities are working to reduce disclosure requirements for investors and speed up position reporting times, but some people are still waiting and seeing.

Fidelity International fund manager Paul Greer said:

In terms of setting up domestic bond accounts, India is undoubtedly one of the most difficult countries.

This has stimulated the growth of offshore investment instruments, with some domestic Indian banks holding sovereign debt (bonds issued by the government) and then offering contracts to foreign investors, allowing them to benefit from the underlying Indian sovereign debt. For example, notes issued by multilateral institutions such as the Asian Development Bank (ADB) and the World Bank, the issuance of such instruments has reached a record $3.7 billion this year.

As more and more foreign capital flows into the Indian bond market, it also means that the country's risk of sudden capital outflows increases. In April, investors withdrew nearly $2 billion from the market due to speculation that the United States would delay interest rate cuts. The Reserve Bank of India is aware of the possibility of increased volatility and has stated that it is ready to use funds from its $656 billion foreign exchange reserves to stabilize the currency.