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India has now overtaken China as the most attractive emerging market (EM) for investing in EM debt, as per 85 soverign wealth funds and 57 central banks representing a total of $21 trillion in assets. 

India is increasingly viewed positively for its improved business and political stability, favourable demographics, regulatory initiatives, and a friendly environment for sovereign investors, according to a recent report by Invesco titled ‘Invesco Global Sovereign Asset Management Study.'

The report included views from 142 chief investment officers, heads of asset classes along with senior portfolio strategists from 85 sovereign wealth funds and 57 central banks.

India, it said, exemplifies the attributes sought by sovereign investors. "India has now overtaken China as the most attractive Emerging Market for investing in Emerging Market debt."

A development sovereign based in the Middle East noted, “We don’t have enough exposure to India or China. However, India is a better story now in terms of business and political stability. Demographics are growing fast, and they also have interesting companies, good regulation initiatives, and a very friendly environment for sovereign investors."

India is among a number of countries, including Mexico and Brazil, that are benefitting from increased foreign corporate investment aimed at both domestic and international demand through “friend-shoring" and “near-shoring".

This was seen as helping fund current account deficits as well as support currencies and domestic assets including debt. Expectations for peaking inflation and a completion of the emerging markets tightening cycle was also playing a role in this trend. Several EMs that saw an increase in their perceived fixed-income attractiveness, including Brazil, were widely expected to be overcoming inflation and to eventually stop tightening and start easing monetary policy.

At the same time important commodity countries including Brazil and Indonesia were seen as well placed for the green transition and electric vehicle revolution, and thus potentially an important source of diversification for sovereigns with more concentrated commodity revenue streams. 

The report said, sovereign wealth funds favour fixed income and private debt, while EMs with solid demographics, political stability, and proactive regulation, particularly India, have emerged as prime investment destinations.

The survey showed a "substantial share" of central banks were concerned by the precedent that had been set. Almost 60 per cent of respondents said it had made gold more attractive, while 68 per cent were keeping reserves at home compared to 50 per cent in 2020.