MUMBAI (Reuters) - Morgan Stanley (NYSE:MS) sees a "good chance" of JPMorgan (NYSE:JPM) including Indian government bonds in its index, and recommended going long on the 10-year benchmark bond yield.
"We now believe that there is a very good chance that JPM will announce the index inclusion of India's bond market in mid-September," strategists Min Dai and Madan Reddy said in a note.
"We recommend to position for a strong INR and lower
G-Sec yields tactically. We like to add a short EUR/INR limit order and long 10-year G-Secs, targeting 25bp lower from here."
The foreign brokerage said actual inflows could take nine to 12 months and will be seen only in June or September 2023.
India's 10-year benchmark bond yield was at 7.23%, while Indian rupee was at 79.80 per dollar.
Morgan Stanley expects rupee to perform relatively well in the region, outperforming other low-yielding global currencies, while it expects the 10-year bond yield to drop by 25 basis points.
"We assume that the monthly increase of FAR (Fully Accessible Route) list bonds is $10 billion in the next 12 months," the report said. "This would suggest that the eligible bonds would be about $360 billion in 2H23, making it the second-biggest bond market after China in the index," it added.
Bond purchases through FAR have no foreign investment cap.
Bond bulls got a boost last month, after the Financial Times reported that JPMorgan was speaking to large investors about adding India to its emerging markets index. Goldman Sachs (NYSE:GS) had previously said it expects an inclusion in 2023, estimating inflows of $30 billion.
Further, Morgan Stanley said bond investors could position themselves before the actual inclusion, which could drive the rally for one or two months in advance, given a prospective $3 billion inflow every month.
These inflows would be support both the rupee and bonds, it added.
Over the medium term, Morgan Stanley expects bond market to attract $18.5 billion a year to push the foreign ownership to
9% at the end of 2032.