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Informist, Tuesday, Sept. 16, 2025

By Aaryan Khanna

NEW DELHI – The reduction in India's weight on JP Morgan's flagship emerging market bond index is unlikely to lead to significant outflows from foreign portfolio investors, especially immediately, according to foreign bankers. The outflows may total $500 million–$1 billion at most over several months, which would have a minimal impact on India's government bond market, they said. Most traders do not see any additional outflows.

On Friday, JP Morgan said in a client note that it was reducing the maximum country weightage on its Government Bond Index – Emerging Markets suite to 9% from 10%. The news broke after market hours Monday. After its inclusion starting in June 2024, India's index weight had risen gradually to the maximum 10% by March. Notionally, the reduction in weight should drive out passive investment worth around $2.3 billion.

However, foreign investors had been underweight India on the index and only a minority of index-tracking funds would have been tracking India at the index weight or overweight, foreign bankers said. Moreover, the discussions ahead of the change and the speculation of the index weight reduction for India and China, two of Asia's largest economies, had been floating around in domestic and offshore dealing rooms since June.

"The discussions we were hearing about had put the cap at 7.5% or 8.5%, so at the margin this is not too bad," the trading head at a foreign bank said. "Plus, most FPIs are underweight India. So, I doubt it will lead to any actual outflows."

Instead, traders said the recent trend of FPI investment in India's gilts is likely to continue. Their holdings of fully accessible route securities, which are index-eligible and have no bar for foreign investment, had on Friday increased to over INR 3 trillion, or $34 billion, after a five-month gap.

The buying is likely to continue with the US Federal Open Market Committee seen on the cusp of a rate-cutting cycle, likely to cut rates by at least 25 basis points on Wednesday. Any commentary that signals more rate cuts than Fed funds futures are currently pricing in, of 75 bps in the remainder of 2025, are likely to drive US Treasury yields lower and make emerging market, higher yielding debt like India's more attractive.

The spread of the 10-year Indian government bond yield over the 10-year US Treasury yield has widened to over 240 bps from multi-decade lows of less than 170 bps in May. In addition, foreign bankers said FPIs are also more positive on India after S&P Global Ratings' vote of confidence in the domestic economy, with its upgrade of India's sovereign credit rating by a notch to 'BBB'.

"This rumour had been floating around in the market for almost four months now, and FPIs have been well prepared," a dealer at a primary dealership with foreign clients said. "Right now, flows are coming in because investors who had exited India see a tactical opportunity after the sell-off here has driven yields higher." After dipping below 6.20% in June, the 10-year benchmark gilt yield has traded in a 6.40-6.66% range over the past month. 

To be sure, pure index trackers are likely to draw out money from India and to allocate it to bond markets which have seen an increase in weightage in the index: Thailand, Poland, South Africa and Brazil. Still, the losses will be mitigated in India's cash bond market as a significant number of FPIs still hold exposure to India through total return swaps, a derivative instrument, or offshore supranational bonds. These supranational bonds, issued in Indian rupees by various multilateral institutions such as the Asian Development Bank, have been a tool of choice. Prices of these more illiquid bonds are likely to react more negatively than local gilts, dealers said.  End

US$1 = INR 88.03

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Avishek Dutta and Akul Nishant Akhoury

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