Insurance CIO sees high institutional demand for Indian bonds | Asset Owners
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Insurance CIO sees high institutional demand for Indian bonds | Asset Owners

The chief investment officer of an Indian insurance company said institutional investors, local and international, are eagerly buying India's bonds as the market prepares to include India in the global basket of bond indices.

“The upcoming inclusion in JP Morgan EMBIGD (JP Morgan EMBI Global Diversified Index) in June 2024 appears to be the key driver for huge inflows in the debt market,” said Ajit Banerjee, CIO of Hyderabad-headquartered Shriram Life Insurance. AsianInvestor.

“Active foreign investors want to be ahead of the game and so have already started taking positions in the debt market.”

Foreign investors have flocked to the country's debt markets this year, pumping in nearly $2.7 billion in February, the highest monthly inflows in more than six years.

They have invested about $14.4 billion in India's debt market in the 12 months ending March 2024 – the highest annual inflows since 2015.

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

“There will be no reduction in demand for Indian bonds going forward. On the contrary, there may be some supply imbalances that we may face next year and in the future.

Shriram Life Insurance, a joint venture between India's Shriram Group and South Africa's Sanlam Group, has assets under management (AUM) of approximately $1.3 billion.

Shriram Group is an Indian non-banking financial services provider with an AUM of approximately $34 billion.

broadening the portfolio

Other experts have also expressed similar hopes.

JPMorgan's decision to include India in its global bond indices in 2024 will bring billions of dollars of foreign fund inflows, said Sriram Iyer, CEO of India's HDFC Pension Management Company. Asian Investor First.

“This will boost India's bond market by bringing in passive inflows of $25-$30 billion between June 2024 and March 2025 and support further development of the domestic capital market,” he said. Asian Investor those days.

International asset managers are also enhancing their Asian bond portfolios with Indian bonds.

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

Similarly, in Morningstar's Asian High-Yield Fund category, India's average weighting in the fund portfolio increased from 13% to 17% over the same period.

“Many funds in Morningstar's local-currency Asia bond category have already begun to prepare their portfolios to reflect the developments that could follow inflows into Indian sovereign bonds,” said Arvind Subramaniam, senior analyst, manager research. “are set to increase, which will potentially provide a tailwind to bond performance.” Morningstar said in a recent note.

Interest in India's bond markets has increased over the past 12 months.
Image Credit: Shutterstock

more complex markets

Nevertheless, transactions in Indian bonds are more complex than other emerging market local currency bonds.

Unlike bonds of many other countries, Indian debt is not euro payable (via global securities clearing platform Euroclear), Nafez Zouq, emerging markets sovereign debt analyst at Aviva Investors, said in a May note.

“From the perspective of international investors, clearing 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.

“The complexity of clearing transactions in India also increases as there is an additional layer of regulations to follow and hours of operation vary. This could be particularly problematic for US managers, some of whom may have to hire additional staff to be able to settle trades,” Zouk said.

Withholding taxes of up to 20% on foreign investors' coupon payments and capital gains remain another hurdle, Zouk said, noting that international investors may seek reimbursement in the form of higher yields or with a lower tax burden. Similar rated sovereigns may prefer risk.

However, given the slowdown in other major economies and persistent interest rate uncertainty, these issues may not deter international investors.

“Overall, the fundamentals of the Indian economy look very strong,” Shriram Insurance's Banerjee said.

“Key macro indicators look positive and there is not much tension building up on the macro side at the moment. The Indian economy remains in a much better position than our western counterparts.

He said that as per IMF estimates, India remains the fastest growing economy and will remain so in the near future.

“Foreign exchange reserves are adequate, which should enable the RBI to maintain a stable currency regime in the near future, unless some extraordinary shocks are imposed.”

According to the Reserve Bank of India, India's foreign exchange reserves reached a record high of $645 billion at the end of March and are currently around the same level.

¬Haymarket Media Limited. All rights reserved.

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