Goldman's On India GBI-EM Inclusion

Goldman Sachs expects the GBI-EM index inclusion to be positive for its receive INR 1y ND-OIS position. At the margin it should also be an INR FX positive, but is not a dominant driver in the near term (the Fed & oil are). See below for more details.

• "We estimate that India's inclusion could prompt passive inflows of around USD 30bn (comprising EM local dedicated funds, as well as blended funds) over the scale-in period as a one-off stock adjustment. However, given India's attractiveness from a yield and (low) vol perspective, we think it could attract at least another USD 10bn of active flows (i.e. overweight positioning, off-index flows by cross-over funds as well as total return positions). So in total, we think India's fixed income markets could see inflows upwards of USD 40bn over the next one and a half years (where the phase-in period will be completed by March 2025). Given that several EM dedicated funds are already set up on India, we think the flows will be front-loaded, beginning immediately, as investors pre-position for inclusion next year."
• "This development should be positive for our receive INR 1Y ND-OIS trade recommendation (entry 6.97%, target 6.50%m current 7.08%, stop-loss 7.25%). Notably, the trade has lost ground over the past couple of weeks on higher oil prices, higher core rates and more hawkish central banks globally, including the US Fed. India's index inclusion should also, at the margin, be positive for the INR. However, the dominant drivers of USD/INR right now are firm US rates and higher oil prices. Nevertheless, we expect the RBI to come in and smooth the pace of INR depreciation, slowing the grind higher in USD/INR."