Indian bonds underpricing global index move, says ICICI Prudential AMC

By Subhadip Sircar and Divya Patil

Markets have yet to appropriately price India’s inclusion into global bond indexes, according to ICICI Prudential Asset Management Co.
 

India will be included in JPMorgan Chase & Co.’s key emerging market bond index as of next month, and foreigners have sent a net $8.2 billion into the eligible bonds since the announcement in September. Still, yields on the benchmark 10-year bond are down only about eight basis points since then, failing to breach the 7 per cent yield level.

“Over the next three to four months, the market would price whatever is to be priced for index inclusion,” Manish Banthia, chief investment officer for debt at over $90 billion manager ICICI Prudential, said in an interview. The “US rates moving higher kind of put a brake on the pricing part. Once US rates come down, pricing will be better and that pricing will not take long.”

The persistent narrative that global interest rates will remain relatively high for a while, as inflation measures in many areas remain sticky, has kept bond yields in many countries elevated. That’s kept yields sticky in India as well, despite the index inclusion, and it’s one reason markets may not have adequately priced entry into the JPMorgan gauges. 

Passive flows into India’s bonds are set to ramp up too, with JPMorgan estimating the securities will attract between $20 billion and $25 billion of foreign money, assuming an index-neutral position. 

As for which bonds to pick, the JPMorgan index is “replicating six- to 7.5-year duration, which effectively means that staying close to the index might be prudent if you have to play that,” Banthia said. “The risk-reward therefore is better toward the belly of the curve, where liquidity is more readily available.”

Once the index-inclusion euphoria plays out, traders will have to look at the growth-inflation dynamics in India for cues on yields, he said.

ICICI Prudential increased the duration across some of its bond funds this year. The modified duration of the government bond fund, a measure of the change in the value of a security to a change in interest rate - stood at 6.26 years in April, compared with 2.06 years in December. 

That fund has returned 7.79 per cent annually over the past five years, the second-best among its Indian peers, according to data from the Association of Mutual Funds in India.