Morgan Stanley Fixed-India Fixed Income Strategy Bond Flows Tracker-110429075

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 Exactly one year since JPM announced India's inclusion in the global bond index, we review the evolving G-Sec market, which is currently experiencing tailwinds from Fed rate cuts. This report covers the flows data for the week ended September 20, 2024.• Debt flows: Indian debt continues to remain attractive among other emerging market economies, with FPIs parking over US$17 billion in 2024. Last week, debt net inflows eased to US$523 million from US$1.8 billion in the prior week. The bulk of the inflow was directed through the FAR channel with a slight inflow via the hybrid funds channel, while the General Limit and VRR (Voluntary Retention Route) channels saw outflows ( Exhibit 1 ).• FAR flows: It's been exactly one year since JPMorgan announced that it would include India in its flagship GBI-EM index. We outline some significant shifts we tracked in the Indian G-Sec market, including flows and positioning during this timeframe.° Our GBI-EM tracker suggests that by August 2023 not many investors had India exposure in their GBI-EM portfolios: 1.7% in bonds and 2.5% in FX. That positioning surged to 3.6% in bonds and 2.9% in FX as of end-May 2024, suggesting that investors had already begun adjusting their portfolios ahead of the anticipated inclusion in late June 2024.° Post inclusion announcement and prior to the actual inclusion, almost 67% of the FPI flows were concentrated in the highly liquid 3-,5-,10-,14-year FAR G-Secs (2026/2028/2033/2037 bonds). Post inclusion, FAR inflows have crossed the US$6 billion mark, with almost 53% of flow positioned in the 2029/2030/2033/2034 bonds, suggesting that FPIs continue to prefer the 5-year to 10-year band ( Exhibit 12 ). ° Some 'off-the-run' bonds like the 2031/2032/2036/2053 bonds also started recording healthy flows, with almost 25% of the post-inclusion flow positioned in this band. This indicates improved liquidity in the longer tenor of the curve. Investors seem to have dispersed concerns after the RBI put curbs on the 14- and 30-year FAR bonds as they continue with their purchases to minimize index tracking errors.° FPI ownership of FAR bonds surged by 306bp from 2.76% to 5.82% of the outstanding stock ( Exhibit 11 ). During the same period, the average of the FPI's duration exposure went up from 5 to 5.5 years ( Exhibit 14 ).° Yield on the benchmark 10-yr G-Sec has eased by around 40bp since announcement. After the Fed delivered a 50bp cut at its September meeting, the 10-yr G-Sec yields softened to a 31-month low of 6.75%.In the medium term, even if the RBI keeps interest rates high versus RoW, which can attract some capital outflow, we expect debt inflows to remain strong on the back of favorable demand a