An increase in the weightage of Indian bonds within JP Morgan’s index could increase demand for these bonds, benefitting banks which hold significant bond portfolios.
JP Morgan’s announcement of India’s inclusion in its Emerging Market Bond Index, set to take effect in June 2024, has ignited a positive response in the Indian financial sector. While the initial market reaction may be seen as a knee-jerk response, experts suggest that this development is poised to have a lasting impact on the country’s banking sector.
Immediate impact
On Friday, the Nifty PSU Bank index saw a notable surge on the news, with an intraday rally of 4.13%, ultimately settling at a 3.5% increase. In contrast, the benchmark Nifty50 index ended the day with a marginal 0.3% decline, and the Nifty Private Bank index dipped by 0.09%. Several individual PSB stocks, including Central Bank of India, Union Bank of India, Canara Bank, Bank of Maharashtra, Bank of Baroda, and Indian Bank, recorded impressive gains ranging between nearly 4% and 9%.
Year-to-date, the Nifty PSU Bank index has exhibited remarkable growth of 20.75%, outpacing the 8.6% rise seen in the benchmark Nifty50 index during calendar year 2023 (CY23).
The way ahead
Analysts foresee that JP Morgan’s decision will have a lasting impact, potentially resetting India’s base rate by March 2024, leading to lower yields and reduced borrowing costs for the nation. This, in turn, is expected to bolster the profitability of Indian companies over the long term.
Additionally, an increase in the weightage of Indian bonds within JP Morgan’s index could generate heightened demand for these bonds. This scenario would be particularly advantageous for banks, as they typically hold significant bond portfolios. Consequently, bank stocks could experience greater stability as a result.
The hurdles
While there is initial excitement in the market, global factors, such as the trajectory of interest rates, oil prices, and geopolitical events, will play a crucial role in shaping the banking sector’s performance. They caution that if broader economic conditions or unforeseen global events trigger market uncertainty, bank stocks could still face selling pressure, notwithstanding JP Morgan’s index decision.
In the last six months, the NSE Bank Nifty index has gained 12%, with a 4% increase since the beginning of the year. However, the US Federal Reserve’s “hawkish pause” has contributed to a risk-averse sentiment in global equity markets, with the US dollar index rising to 105.52 and the US 10-year bond yield reaching a 16-year high of 4.5%. Foreign institutional investors (FIIs) have also reversed their “Buy India strategy,” resulting in significant selling in the Indian cash market in September. Since FIIs and FPIs hold substantial stakes in banking stocks, their continued selling may exert downward pressure on related stocks in the short term.
