“It is a matter of ‘when’ and not ‘if’ India will be included in the bond index,” insists arihant Bardia, Founder and CIO, Waltrust Capital. Given the size of its government bond market, India may eventually gain 10% in the index once Inclusion Some have been accomplished at the expense of other emerging markets. Post-inclusion, investments made based on the composition of the index are expected to bring an estimated inflow of $30-40 billion into India. Suyash Choudhary, Head – Fixed Income, IDFC The AMC, says, “is expected that the flow associated with actual index inclusion may take some time, and while the weighting given to Indian bonds in the index will only increase gradually, other ‘rapid money’ inflows may stop this and start over.” Can. I’m coming.” A larger inflow would drive up government bond prices and lower yields.
The bond market is already anticipating the move. Yields on 10-year government bonds softened to 7.15% as local investors took positions in longer-term bonds. But will this initial enthusiasm set the stage for a longer rally for government bonds? Should investors use this opportunity to bet on long term gilts? “With the 10-year GSEC hovering around 7.3%, long-term gilt funds make a great Investment choice,” says Baradiya. However, be careful. Bond prices tend to have a greater impact due to the government’s planned higher spending and heavy borrowing. A large supply of government bonds without matching the incremental demand will put downward pressure on bond prices.
Bond prices and yields move in opposite directions. According to Chowdhary, the issue of duration absorption may persist even after the initial excitement subsides. “Nothing changes our underlying view that if there is any concern that the bond markets should be in the medium term, it is the quantity of the term supply. Absent offshore investors meant the RBI had to expand its balance sheet. Moved to buy bonds as a means of doing business. With index inclusion, offshore investors would buy bonds and RBI would get dollars to expand the balance sheet. Then RBI would not need to buy bonds. Either way, In the medium term, the eventual impact on bond yields could be similar.”
In addition, the external environment has become more hostile to Indian bonds. The 10-year US Treasury yield has risen after a sharp move by the US Federal Reserve suggesting that rates continue to hike. Given the slow economic growth, the initial hopes of a softening of the Fed’s stance were dashed. Other major global central banks also appear intent on following through with aggressive rate hikes. Pankaj Pathak, Fund Manager – Fixed Income, Quantum MF, argues, “This is not a conducive environment for foreign investors to invest in emerging economies. Thus, we do not expect large inflows from foreign investors immediately, Even if India joins global bond indices, it will be a positive sentiment for domestic investors and may extend the bond rally for some more time. “However, there is a possibility of inclusion in the market,” says Sandeep Bagla, CEO, Trust MF. Still, duration funds can reap the benefits immediately. However, ultimately the returns will depend on the inflation trajectory.”
Given the clouds over there, experts suggest avoiding incremental investments in long-term funds or bonds. Pathak argues, “Keeping in mind the period-earnings balance, the 3-5 year segment continues to be the best play as to the core portfolio allocation. The long end of the yield curve is vulnerable to an unfavorable demand-supply shock. He expects the 10-year government bond yield to continue to trade in a broad range of 7.1%-7.5%. Chowdhury agreed, “Given how forgiving the global environment is, we tend to be much more ‘tactical’ with our portfolio strategies by trying to chase bull flattening (long-term rates falling faster than short-term rates). Don’t want to be). We continue to get the highest value in 4-5 year government bonds.