India government securities (Gsec) are gaining weight in emerging market portfolios with the scheduled inclusion in the GBI EM (emerging markets) index on Friday, noted HSBC.
Gsec, available under the fully accessible route (FAR), will be added to the index and the inclusion process will be phased over 10 months (reaching a weight of 10% by March 31, 2025, wrote the bank in a note to clients.
There are 38 FAR Gsec, but only 28 bonds (outstanding amount of $413 billion) are eligible for inclusion. HSBC believes that five-year, seven-year, 10-year and 30-year benchmarks alone could closely track the return performance of these 28 bonds.
In addition, a low foreign positioning in benchmark bonds and a relative increase in their index weight versus other bonds, which aren't active in the auction cycle, means that these bonds are likely to be the key target of foreign flows, stated the bank.
HSBC had estimated indexation-related inflows of $20 billion-$22 billion into Gsec. However, Indian government bonds have already seen inflows of $10.4 billion since the inclusion announcement last Sept. 21.
This poses the question of whether a large part of indexation-related inflows has materialized. HSBC notes that index-eligible bonds have recorded inflows of only $8.3 billion and four off-the-run issues alone have received 66% of the foreign investments. In the bank's view, a large part of inflows has yet to materialize and this is likely to be led by benchmark issues.
To accommodate India's 10% weight in the index, a reweighting will occur for other EM peers in the index, which will see a reduction in their weights. In HSBC's view, the reweighting impact won't be "significant," given that India's inclusion will be phased over a 10-month period.
The bank also finds that reweighting is likely to be less meaningful for EM high yielders, given their market size, while the largest reduction in weights at the end of the 10-month period is likely to occur for Thailand, Poland and Czech Republic.
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