Mumbai:
Morgan Stanley sees a “good opportunity” for JPMorgan to include government bonds in its index, and recommended going long on the 10-year benchmark bond yield.
“We now believe there is a very good chance that JPM will announce the index draw of the Indian bond market in mid-September,” strategists Min Dai and Madan Reddy said in a note.
“We recommend positioning for a strong INR and below
G-Sec delivers tactically. We’d like to add a short EUR/INR limit order and long 10-year G-Secs, targeting 25bp lower from here.”
The foreign brokerage said the actual influx could take nine to 12 months and won’t be seen until June or September 2023.
The yield on 10-year benchmark bonds was 7.23%, while the Indian rupee was 79.80 per dollar.
Morgan Stanley expects the rupee to perform relatively well in the region, outperforming other low-yielding global currencies, while it expects 10-year bond yields to fall 25 basis points.
“We estimate the monthly increase in FAR (Fully Accessible Route) bonds to be $10 billion over the next 12 months,” the report said. “This would indicate that eligible bonds would be around $360 billion in 2H23, making it the second-largest bond market after China in the index,” it added.
Purchases of bonds through FAR have no foreign investment limit.
Bond bulls received a boost last month after the Financial Times reported that JPMorgan was talking to major investors about adding India to its emerging markets index. Goldman Sachs had previously said it expects a withdrawal in 2023, with an estimated inflow of $30 billion.
Further, Morgan Stanley said bond investors could position themselves ahead of the actual withdrawal, which could fuel the rally a month or two in advance, given projected inflows of $3 billion a month.
These inflows would support both the rupee and bonds, it added.
In the medium term, Morgan Stanley expects the bond market to attract $18.5 billion a year to drive foreign ownership
9% at the end of 2032.