What The Fed's Pivot Signal Means For Indian Bonds And Rupee

Indian assets continue to remain a lucrative destination for foreign portfolio investors even as the US Federal Reserve indicated at an end to its aggressive rate hike cycle in 2024, according to analysts and market participants.

US Fed officials unanimously decided to hold interest rates steady at 5.25-5.50%, the highest since 2001 for the third consecutive meeting, according to the Federal Open Market Committee statement on Wednesday night.

FOMC officials also projected three rate cuts next year. In reaction, the yield on the US 10-year treasury dropped 16 basis points to 4.04% after the decision. Similarly, the yield on India’s 10-year benchmark bond fell 6 basis points, against its previous close, to 7.2%.

“There is a moderation in Indian government bond yields in correlation to the US Treasury, but the extent of the drop is significantly lower,” Sakshi Gupta, principal economist at HDFC Bank said. “Flows will continue to come in. We have a positive spread and it is only going to widen.”

Gupta expects a spread of 300 basis points between the US treasury yields and Indian government bond yields by the end of December 2024, which is lucrative enough for foreign fund inflows. The quantum of foreign fund inflows may not be as significant as it was October and November, Gupta said.

Moreover, foreign money on account of inclusion of Indian bonds in the JPMorgan’s emerging markets bond index will also augur well for the Indian government securities market. Several analysts estimate overseas funds worth $20-25 billion to hit the Indian government bonds market on account of bond inclusion.

While the rupee has remained in a tight range for last few months, DBS Bank India’s Head of Treasury and Markets Ashish Vaidya expects the Indian currency within a range of Rs 83-83.40 for the next year.

“Dollar index will be key driver for the rupee movement in the coming months,” Vaidya said. The dollar index fell 102.59 at the time of publishing, compared with 102.87 late on Wednesday.

“In the next 3-6 months, we are looking at Rs 83-84 levels for the rupee considering all sorts of risks and reactions,” Gupta said. “But, it will also depend on how comfortable RBI is to let the rupee adjust to market fundamentals,” she added.

Post the general election in India, the rupee is expected to hover around Rs 82-83 per dollar.