India imposed controls on foreign ownership of some newly issued bonds, a surprise move that highlights officials are getting uneasy with the billions of dollars of hot money inflows tied to the inclusion of its debt in a key global index.

Overseas investors will no longer have full access to freshly issued Indian government bonds with 14-year and 30-year tenors, according to a statement by the Reserve Bank of India (RBI). The change is effective immediately, the RBI said, without citing a reason. Authorities want demand to be concentrated in the front end to improve flexibility of the curve, according to officials with knowledge of the matter.

The step comes a month after JPMorgan Chase & Co began including Indian government securities in its main emerging market index, and amid volatility in global markets caused by election results and central banks adjusting policy. The country’s joining the gauge marked a milestone, improving access to one of the best-performing but tightly regulated debt markets, with one of the lowest foreign ownership ratios among emerging economies.

“It does point to the fact that the government continues to be reluctant to encourage foreign bond inflows,” said Shamaila Khan, UBS Asset Management’s head of fixed income for emerging markets and Asia Pacific.

Data compiled by Bloomberg show foreign investors stepped up their holdings of longer-dated Indian debt in recent months, potentially a bid to lock in yields before any RBI interest rate cut. Still, roughly 40% of of the money is parked in FAR notes with maturities of five years or less.

Authorities want demand to be concentrated in bonds with tenors of 10-years, according to the officials who asked not to be identified as the matter is private.

The maturities of the 27 FAR bonds eligible to join JPMorgan’s index range between June 2027 and January 2054, according to a June report by the Wall Street lender. The August 2033 bond has the largest weight.

A spokeswoman for JPMorgan declined to comment when asked by Bloomberg whether the July 29 directive would lead to a change in the composition of securities included its index. The RBI did not immediately respond to Bloomberg’s request for comment.

India’s local-currency bonds are the top performers in emerging Asian this year, handing investors a return of 8.1%, data compiled by Bloomberg show. The yield on India’s existing 30-year security rose two basis points to 7.05% on Tuesday.

Global funds have poured more than US$12 billion into freely accessible bonds since India’s index inclusion of was announced in September. The RBI has bought up dollars coming in, with its foreign exchange reserves swelling to a record, in order to keep the rupee on an even keel.

Goldman Sachs Group Inc and others have estimated that India’s accession to the gauge would attract flows of as much as US$40 billion. The country’s weight will progressively rise to 10%.

Long wary of the kind of capital flows that led to the Asian financial crisis, India opened a swath of its sovereign bond market to overseas investors in 2020. Having removed Russian bonds from its widely-tracked indexes following the 2022 invasion of Ukraine, JPMorgan announced India’s inclusion last September.

But unlike China, which made a number of changes changes to its debt market before joining the Wall Street bank’s gauge in 2020, New Delhi has baulked at tax changes for foreigners that would have facilitated the trading of Indian debt on international platforms such as Euroclear.

There are currently more than 30 FAR securities, according to The Clearing Corp of India.

  - Bloomberg