(Bloomberg) -- India’s sovereign bond market is attracting foreign equity investors, who are using the securities as collateral for trade margin requirements.
The inclusion of the nation’s government debt in JPMorgan Chase & Co.’s emerging- market bond index last month has enhanced their acceptance as collateral. This development is appealing to overseas investors, as they can now earn interest on their bond holdings, unlike with traditional cash or cash-equivalent margin postings.
“These investors have bought front-end government securities with 1-2 year maturities,” said Vikas Jain, head of India fixed income, currencies and commodities trading at Bank of America Corp. “In this bucket, we’ve seen flows of $1.5 billion,” since the announcement of India’s inclusion in September, he said.
A combination of high yield, a stable currency and the possibility of capital appreciation has created a new demand segment for Indian government securities. The nation’s sovereign debt has returned 5.7% so far in 2024, versus a 2% gain in Indonesian local currency bonds, according to data compiled by Bloomberg.
“Better inflation data should allow the Reserve Bank of India to ease monetary policy while expectations for the upcoming budget are benign in terms of the fiscal deficit,” increasing the appeal of local bonds, said Rajeev De Mello, global asset portfolio manager at Gama Asset Management SA.
Read: Foreign Banks Are Snapping Up Shorter India Bonds, BofA Says
Foreigners have plowed 978 billion rupees ($11.7 billion) into index-eligible bonds since JPMorgan announced their inclusion last year. The South Asian nation, which has been a favorite pick among investors looking away from China, has attracted equity inflows of $2.6 billion so far this year, adding to net overseas investments of $21 billion in 2023.
Overseas investors can use government securities, corporate bonds, cash, and triple-A rated foreign sovereign securities as collateral to meet their margin requirements for trades in both cash and equity derivatives segments, according to the securities regulator.
--With assistance from Khushi Malhotra.
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