Dear Reader,
It is two weeks into the new year, and we still cannot stop ourselves from reminiscing about the year gone by. For India’s bond market, 2023 was a bumper year that witnessed $7.2 billion worth of inflows, the highest in six years. This year, foreign investors can’t wait to get their hands on Indian government bonds.
Already a billion dollars has flowed into bonds in the first two weeks with a promise of more. And why not? The stars have aligned for India’s bond market with domestic inflation expected to ease and trigger rate cuts. The December inflation print at 5.69 percent did not surprise analysts, but the deceleration in core inflation did. Core inflation is demand-driven and hence of utmost importance to monetary policy. Long story short, the Reserve Bank of India will find less reasons to resist rate cuts as we chug along this year.
Then there is the US Federal Reserve, expected to begin cutting rates by June. These expectations, fanned since mid-last year, resulted in record inflows into bond exchange traded funds last year. “Stock funds sucked in a net $640 billion, below the $1 trillion of 2021, but fixed income ETFs vacuumed up a record $332 billion, surpassing the previous zenith of $282 billion in 2021,” states this Financial Times article. The inclusion of Indian bonds in global indices could not have come at a better time.
An estimated $40 billion which translates into a cool Rs 3.5-4 lakh crore in today’s exchange rate will flow into Indian bonds as they join other emerging market peers in the JP Morgan bond index in June. Bloomberg, another index host, will also include Indian bonds and add to these flows. The inclusion is an acknowledgement of foreign investor interest in one of the fastest growing economies of the world that carries the badge of an alternative to China now.
Indeed, the bond market is becoming a force to reckon with as this Bloomberg column highlights. At least $1 trillion worth of bonds change hands daily, the column points out. Despite two wars that drove up commodity prices globally, a series of rate hikes by the US Fed and a hawkish domestic central bank, India’s government bond yields hardly budged last year. This has given the conviction to bond investors that this year would be better. When the market refuses to balk at every possible headwind, there is no reason for it to not thrive when the winds are with it.
One big moving piece is the fiscal policy, that will be put to test next month. In an election year, budgets are tricky, but the government has given assurance that fiscal prudence will be priority. That means the Centre won’t choke the markets with bond supply.
Of course, there will be some pruning of expenditure and our column here details how the government can balance growth with spending cuts.
The bond market is buying the fiscal story so far. Bond desks are working with a government borrowing of Rs 15 lakh crore for FY25. In the face of the surge in demand from domestic long-term investors and foreign investors, the supply pile looks easy to absorb.
2024 could indeed be a Goldilocks year for India’s bond market with both monetary and fiscal policy in a friendly phase. We ask the question whether India’s bonds will best their 2023 show this year? in our column.
The answer is yes since Goldilocks is buying.
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