“Indian bond yields have been higher in recent months, and the interest rate differential between India and other Asian countries like China provides a good entry point for FPIs at the moment,” said Madhavankutty G, chief economist at Canara Bank.
Foreign investment in Indian debt bonds was modest in November. Expectations of an interest rate cut and depreciation of the rupee influenced these flows. Economists foresee a positive outlook in the medium term. The Reserve Bank of India is expected to support the bond market. Interest rate differentials with other emerging markets offer advantages for foreign investors. Inclusion in global indices is also expected to boost inflows.
Market participants also expect policy support for bond yields, mainly due to a delayed US trade deal and the decline in the Indian rupee. The rupee closed at 89.55/$1 on Monday, its weakest close ever.
“Indian bonds are likely to be more attractive as I expect the RBI to come up with some policy support for rates,” said Dhiraj Nim, economist and currency strategist at ANZ Bank. “If the RBI cuts rates this week, it will be the last rate cut. After that, I expect open market operations, especially if there is no trade deal. So OMOs can make bonds more attractive.”
AgenciesFLOW CHECK Rate Cut Hopes Boost Inflows, But Rupee Fall Keeps Net FPIs Muted in November
Bloomberg Index
Talks about the inclusion of Indian government bonds in Bloomberg’s Global Aggregate Index are also expected to lead to inflows as market participants have expressed an optimistic view on the ease of trading, Indian government bonds and overall returns on Indian government bonds versus other emerging market bonds.
“Expectations about integration don’t come at the end, they are set in advance,” says Madhavankutty G.
Certainly, Indian FAR securities are currently part of the JP Morgan EM index, the Bloomberg EM sovereign local currency index and the FTSE Russell EM sovereign bond index.
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