Investors tracking the JPMorgan Emerging Market debt index are bullish on India and had allocated 3.6% of holdings to the country's bonds as on end-May, ahead of their inclusion on the index this week, Morgan Stanley said.

Investors have already pre-positioned for the index inclusion to some extent, Min Dai, head of Asia Macro strategy at Morgan Stanley, said in a note on Friday.

More than $200 billion in assets track the JPMorgan Emerging Market debt index, in which India will eventually have a weight of 10% by March 2025. The weight will increase by 1% each month starting June 28.

According to Morgan Stanley's estimates, investors' tracking the index have also allocated 2.9% of holdings to the rupee as of end-May, which would reduce their "need to strictly follow the index by adding 1% per month".

"We estimate that investors still need to add 8-9% of their AUM (assets under management) in India in the next 10 months," Morgan Stanley said.

India's inclusion in the JPM index could prove to a headwind for other large emerging markets such as Thailand, South Africa and Brazil as investors would need to sell these bonds or devote fresh inflows to buy into India, Morgan Stanley said.

Indian bonds eligible to be included in the index have already attracted more than $10 billion inflows since the announcement of the inclusion in September 2023 and more chunky flows are expected this week. (Reporting by Jaspreet Kalra; Editing by Mrigank Dhaniwala)