Indian Equities have been a consistent part of global investors' portfolios for over a decade. More and more investors have allocated to Indian equities as a 'single country allocation', moving away from an EM-based allocation. In contrast, Indian Debt has failed to catch global investors' attention. Let alone being considered a single-country allocation, it has not found any meaningful representation in EM debt portfolios. (1)

 

Foreigners hold a meagre USD 41 billion of Indian Local currency debt as opposed to USD 800 billion of Indian equities2. This is likely to change.

JP Morgan has included India in its Global EM Index. It was the first Index provider to do so. Bloomberg has followed suit, and in time to come, India could also find its way into global indices. What changed? From the JP Global EM Index perspective, Russia went out of the Index post the Russia-Ukraine conflict, investors became vary of excessive exposure to China, and the lack of large, credible economies in the Index to diversify meant India became compelling. India's opening of debt access to global investors has helped, too. A decade ago, Foreign Portfolio Investors (FPIs) could not regulatorily invest more than USD 30 billion in Indian Government Bonds (IGBs). (3)  It was a major reason to be rejected from indices. In contrast, today, FPIs have unhindered access to almost USD 480 billion of IGBs eligible under the Fully Accessible Route (FAR). There is an additional limit for other IGBs (outside of the FAR universe), which presently stands at a little under USD 50 billion. (2)

 

In theory, FPIs could hold almost 45% of outstanding IGBs today but presently have less than 4% under 2% pre-announcement of Index inclusion2.

India's macroeconomic fundamentals have been the strongest since economic liberalization (commencing in 1991). It is now one of the biggest global economies, estimated to be USD 4 trillion annually, and the third largest global economy by 2027. Its GDP continues to grow at a healthy nominal rate of 7-8%.  Its central bank has found immense success in curtailing inflation after moving to a targeting regime (a decade ago, a 4% target in the medium term, with a band of 2-6%). The current Account Deficit has narrowed to under 1% of GDP in FY2023-24, and the Balance of Payments are positive almost every year due to strong capital inflows. The central government has been stable, focusing on fiscal prudence and infrastructure spending. The demographics are in its favour, and the Make-In-India programme and 'China plus one' global supply chain policy could benefit India to boost manufacturing over the next decade.

 

S&P appears to be in agreement with India's improving economic fundamentals! It recently upgraded India to a 'Positive' outlook. Presently, India's rating is borderline Investment Grade (BBB—). A ratings upgrade would provide additional comfort for global investors with an IG-only mandate.

A country's macro story may be as good as it can get, but what good is it if it cannot generate adequate risk-adjusted returns for investors? Indian fixed income has historically fared well on this count as well. A quick comparison of the S&P BSE India Government Bond Index (Total Return) vs. the Bloomberg USA Index (Total return unhedged) shows massive outperformance in India's favour.

 

The S&P BSE India Government Bond Index has generated a total return of 59.01% (USD) over the last decade Versus 13.29% for the Bloomberg US Agg Index. A staggering 4.44x return over a decade. (4)

It is not that this performance was unrealizable. We at Kotak compared the performance of two of our largest offshore debt funds one which invests in INR-denominated bonds and the other in USD-denominated bonds, versus the performance of a universe of 75 largest Investment-Grade bond funds representing total AUM of over USD 3 trillion. (5)

 

Our analysis revealed that our two funds consistently rank in the Top Decile of this universe over a 1-year, 3-year, 5-year, and 10-year period. (6)

Other single-country emerging markets or frontier fixed-income markets may have outperformed India in different periods. But do they have the size and stability of India? Are they big and compelling enough to find a single-country allocation? Today, India checks most of these boxes and is likely to become a permanent feature of global fixed-income investors!

 

 

Tanveer Sethi, a Fixed-Income Portfolio Manager at Kotak Mahindra Asset Management (Singapore) Pte. Ltd., authored this article.

(1) Based on low FPI participation in Indian debt

(2) Source: FPI Debt Monitor, NSDL. Data as of May 2024. Currency Exchange as of 31/05/2024.

(3) Source: SEBI circular CIR/IMD/FIIC/ 17/2014 dated July 23, 2014

(4) Source: Bloomberg. Performance data from 05/30/2014 to 05/31/2024

(5) Source: Bloomberg. Performance data as of 31/03/2024.

(6) For the complete criteria used for the analysis, please get in touch with Kotak Mahindra Asset Management (Singapore) Pte. Ltd. at 16 Raffles Quay, #35-04A Hong Leong Building, Singapore 048581.

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