MUMBAI (Reuters) - Foreign investors are increasingly being drawn to the traditionally overlooked rupee-denominated corporate debt market in India as they gear up for the inclusion of domestic government securities to a global bond index next month, recent data showed.

While current investments remain modest, four bankers and fund managers said they anticipate an uptick as more investors familiarize themselves with Indian debt instruments.

"We have seen increased interest in Indian corporate bonds from global fixed income investors as they get more engaged in Indian markets," Siddharth Bachhawat, head of markets at Barclays India said.

Foreigners have typically preferred to remain largely invested in government bonds so far.

Indian government bonds are set to be included in the JPMorgan Emerging Market local currency debt index from June 28, with market participants anticipating passive inflows of around $25 billion as a result.

Foreign investors have bought a net of 80 billion rupees ($963 million) in rupee-denominated corporate bonds since the start of 2024 after remaining net sellers for six consecutive years through 2023, with an aggregate sale of 1.06 trillion rupees, depository data showed.

Buying activity has picked-up in shorter-duration bonds issued by state-run entities such as REC and PFC, traders said, with some experts foreseeing better liquidity as well.

Though currently there is no liquidity in the high yield Indian corporate bond market, index inclusion would encourage more flows, said Hui Sien Koay, lead index, fixed income strategist for APAC at BlackRock.

This increasing interest is also making some overseas fund managers consider launching exchange traded funds focused on Indian corporate debt.

U.K.-based Tabula Investment Management, which currently provides government bond exchange traded fund, has said they are mulling a possible launch of corporate bond ETFs.

"We have been talking to investors about Indian corporate bonds and may be this would be the next fund in our India series. We might be looking at an Indian corporate bond fund potentially, depending upon the success of IGB fund," Jason Smith, CIO at Tabula told Reuters, without giving other details.

Apart from rupee bonds, investor demand has also stayed robust for dollar bonds of Indian companies since the start of 2024, with companies having to shell out lower coupons than their initial guidance.

($1 = 83.1110 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Nivedita Bhattacharjee)

By Dharamraj Dhutia