MUMBAI, May 27 (Reuters) - Overseas investors are buying longer-duration Indian government bonds ahead of their inclusion in JPMorgan's emerging market debt index, as they expect these securities to draw a large chunk of passive flows.
Foreign investors have sold a net of 117 billion rupees ($1.41 billion) of government bonds in the last 10 weeks, but notes with maturity of 10 years and more have seen inflows, clearing house data showed.
India's former benchmark 7.18% 2033 bond has led inflows, followed by the 7.30% 2053 paper.
"The 9-year and above maturity bonds represent 50% of India's future weight in the index and therefore will receive special attention from investors," said Clément Niel, a portfolio manager for emerging markets local debt at BNP Paribas Asset Management.
"We expect more flows here as investors ramp up their passive exposure to India," Niel added.
At 12%, the 2033 bond has the largest foreign ownership within bonds that come under the so-called fully accessible route, which permits unfettered overseas buying.
The 2053 bond is 3.6% owned by foreigners.
Along with direct purchases, foreign investors have leaned on derivative proxies to gain exposure to Indian bonds.
Inclusion in the JPMorgan emerging market debt index from June 28 could bring in around $25 billion of passive inflows, according to market estimates, while active fund managers have already started buying.
Until March, much of the overseas buying was in shorter-duration bonds but fund managers are now changing strategy.
Index inclusion and slowing inflation globally will help push long rates lower in the future, BNP Paribas Asset Management's Niel said.
Allianz Global Investors, which is boosting its India exposure, is targeting bonds including the 30-year security that will be included in JPMorgan's index.
"The long end of the bond curve is typically mostly affected by the fiscal picture," said Giulia Pellegrini, senior portfolio manager for EM fixed income at AllianzGI.
"And in India, it is a positive fiscal picture. So, we don't mind at all having exposure to the long end as well."
The Indian government is looking to reduce its fiscal deficit to 4.5% by March 2026, with a recent large dividend from the central bank reducing risk to government finances.
Meanwhile, a rise in U.S. yields and a decline in the Indian rupee earlier this year led to outflows from shorter-term bonds.
"A significant portion of the outflows occurred due to position unwinding facilitated through total return swaps (TRS)," said Manish Bhargava, a fund manager at Straits Investment Management.
($1 = 83.0790 Indian rupees)
(Reporting by Dharamraj Dhutia; additional reporting by Jaspreet Kalra; Editing by Eileen Soreng)
