By Dharamraj Dhutia
MUMBAI (Reuters) -The recent addition of Indian government bonds to JPMorgan (NYSE:JPM)'s emerging market bond indexes has prompted BNP Paribas (EPA:BNPP) Asset Management to turn "more positive" on these securities, expecting inflows of around $20 billion in domestic bonds in the next two years, an official from the fund said on Thursday.
JPMorgan included Indian bonds to its emerging market debt index last week.
"We expect bonds to rally and should see the 10-year benchmark bond yield easing below 7% by end of this year," Jean-Charles Sambor, head of emerging markets, fixed income at BNP Paribas Asset Management told Reuters.
The benchmark 7.18% 2033 bond yield was trading at 7.23% on Thursday, after hitting a two-month low of 7.07% last Friday in the immediate reaction to the inclusion news. The yield last traded below 7% in June.
"The muted reaction currently is due to weak global risk appetite," Sambor, who said inflows could rise if India becomes a part of other global indices.
"The very short-end will not matter for global investors, and they would be looking at the 10-year, which would be the sweet spot for now. When you look at bond inclusion, long end should be well supported," Sambor said.
Foreign holding of the benchmark 2033 bond has nearly tripled to 16.1 trillion rupees as on Sept. 27, up from 6.75 trillion rupees before index inclusion announcement, data from Clearing Corp of India showed.
Market participants expect inflows to pick up on more auctions of the note.
Sambor said even though the differential between Indian and U.S. 10-year bond yields is shrinking, he expects inflows to persist.
"U.S. yields are near peak and we are very close to the end of the tightening cycle. As soon as we see that, capital flows would be back to emerging markets, including India."
The 10-year U.S. yield jumped to 4.60%, and spread with Indian counterpart stands at around 260 basis points.
Sambor said bond index inclusion is positive for the local currency as well, as the inflows could see rupee rising to 82.00-82.25 per dollar levels over the next six months, from near record lows currently.