Indian rupee sees mild gains, bonds muted as JPM index flows undershoot estimates

By Jaspreet Kalra and Dharamraj Dhutia

MUMBAI (Reuters) - India's rupee rose slightly, while government bonds were unable to gain meaningfully on the day of the much-awaited inclusion of the country's sovereign debt into a widely-tracked JPMorgan debt index as inflows underwhelmed investors.

Early on Friday, the rupee touched a peak of 83.3675 against the U.S. dollar and ended 0.1% higher at 83.3825. The benchmark bond yield was marginally higher at 7.01%.

Foreign exchange market indicators had pointed to inflows, likely due to passive funds buying bonds, but multiple market participants said the quantum of inflows was sharply lower than anticipated. Traders had been betting on inflows of up to $2 billion spread over Thursday and Friday.

By 4:00 p.m. IST on Friday, traders said a maximum of 40 billion rupees ($480 million) may have come into government bonds.

In the previous session, bonds under the so-called fully accessible route, which will be added to the JPMorgan emerging market debt index, saw a net purchase of around $120 million by foreign investors.

"The market expected passive investors to jump in on the first day to minimise tracking error," Deepak Sood, senior partner and head of fixed income at Alpha Alternatives, said.

"However, it seems that the flows will pick up gradually as most investors need to rebalance their portfolios. We are confident that the momentum will increase in coming days."

India's inclusion in the JPMorgan index was announced in September, setting the stage for billions of dollars to flow into the world's fifth-largest economy.

Since then, foreign investors have bought nearly $11 billion of government bonds under the fully accessible route.

Nagaraj Kulkarni, co-head for Asia rates strategy (ex-China) and head - flows strategy at Standard Chartered Bank expects a pick up from July.

"Index related inflows are underway for some time now, and we expect them to continue. We expect inflows to be spread out over a period rather than on one specific day," he said on Friday.

($1 = 83.3790 Indian rupees)

(Reporting by Jaspreet Kalra and Dharamraj Dhutia; Editing by Eileen Soreng and Mrigank Dhaniwala)