Morgan Stanley Fixed-India Fixed Income Strategy Bond Flows Tracker-110334220

M UpdateIndia Fixed Income Strategy | Asia PacificBond Flows Tracker Morgan Stanley India Company Private Limited+Nimish M PrabhuneStrategist Nimish.Prabhune@morganstanley.com +91 22 6138-5676 Morgan Stanley Asia Limited+Min DaiStrategist Min.Dai@morganstanley.com +852 2239-7983 FPI debt investments saw a notable surge, with FAR flows rebounding last week. Liquidity continues to be in surplus mode. India's sovereign debt market has seen a steady influx of funds from FPIs since the inclusion of FAR bonds in JPMorgan's GBI-EM index. At present, India's weighting in the index is 3%, expected to increase to 10% – mirroring China's weight – by the end of March 2025. This report covers the flows data for the week ended September 13, 2024.• Debt flows: 2024 continues to stand for significant purchases, with FPIs parking more than US$16 billion in Indian debt markets ( Exhibit 8 ).° Debt investments surged last week, with inflows exceeding US$1.8 billion, compared to US$922 million the previous week. The bulk of the inflow was directed through the FAR route, but the VRR (Voluntary Retention Route) and hybrid funds route also received substantial investment. This shift indicates that FPIs are broadening their investment focus, seeking higher returns and diversifying their portfolios, which bodes well for India's duration outlook ( Exhibit 1 ).° September inflows have climbed to US$2.8 billion, surpassing August's post-election peak of US$2.1 billion ( Exhibit 4 ).• FAR G-Sec flows continue to be on the uptrend, with FPIs adding nearly US$13 billion in the FAR suite of bonds this year. As a result, FPI ownership ticked up by 16bp to 5.72% last week ( Exhibit 2 ). ° Last week FAR bonds witnessed an inflow of US$873 million versus US$145 million in the week prior ( Exhibit 1 ). Consequently, the 5-day moving average of FAR flows exceeded the 20-day moving average. Overall, FPIs have added US$1 billion in FAR G-Secs so far in September versus US$2.8 billion in August and US$2.3 billion in July ( Exhibit 10 ).° Yields on the benchmark 10-year G-Sec eased to 6.79% last week amid rising expectations of a Fed rate cut at the September 18-19 FOMC meeting. Consequently the average spread of 10y G-Sec to UST widened by 10bp to 315bp ( Exhibit 7 ). Our economists think the Fed will decide to cut 25bp and the decision "will likely be unanimous". Should a 50bp rate cut take place, we expect some FAR outflows ahead of eventual inflows as it would suggest that the US economy is slower than projected earlier and needed a deeper cut.° Although a 50bp rate cut could result in an FPI sell-off initially, domestic demand may mitigate this effect amid rising pressure on the RBI to cut the repo rate or at least change its stance at the October policy meeting. Yields on the longest tenure 50y G-Sec eased by 3bp and fell below 7% for the first time with strong demand from insurance companies and pension funds, which hold nearly 28% and 5% of the total G-Sec supply, res