Stars Align for India Bonds After First Yearly Gain Since 2020

(Bloomberg) --

Indian sovereign bonds, coming off the best annual performance in three years, are poised for further gains on expectations that their upcoming inclusion in a global bond index will lure big foreign inflows.

The benchmark 10-year sovereign yield fell 15 basis points last year, the most in three years. It’s expected to slide by more than 30 basis points by the end of 2024 from 7.22% on Thursday, according to the median estimate in a Bloomberg survey. 

Here are charts showing the state of play in the Indian bond market:

Foreign Flows

India’s trillion-dollar sovereign bond market is gearing up for a rush of foreign money in the run-up to inclusion in JPMorgan Chase & Co.’s emerging markets bond index in June. That may lead to inflows of up to $40 billion, according to estimates.  

Foreigners bought $8.4 billion of local bonds last year, the most in six years. Investors have been particularly drawn to the index-eligible Fully Accessible Route, or FAR bonds, which were created by authorities to allow full foreign ownership in certain securities. 

The instrument drew over 350 billion rupees of purchases since the index announcement in September last year.

Rate Cuts

Bets of rate cuts by the central bank may also spur more bond investments in the country, according to traders. 

The Reserve Bank of India is expected to start cutting interest rates earlier than anticipated in response to the Federal Reserve’s accelerated easing cycle, according to Goldman Sachs Group Inc. The RBI’s two previous rate-cut cycles showed that a rally in government bonds preceded actual cuts, according to ICICI Direct Research.

“If we see 50-75 basis points of rate cuts by the year end, the 10-year yield could reach 6.50% by the end of the year,” said Pankaj Pathak, portfolio manager at Quantum Asset Management Co.

Fiscally Conservative Budget

The federal budget for the next fiscal year, which is due early February, is likely to be prudent as Finance Minister Nirmala Sitharaman has said no major announcements should be expected. The statement helped ease worries over extra spending ahead of general elections that are expected in April or May. 

The supply of government bonds, on a net basis, is expected to decrease by around 1.6 trillion rupees over the next two years, Quantum Asset Management said. 

“The demand-supply dynamic is not an immediate concern as the interim budget in February is unlikely to throw up a surprise in the borrowing number for next year,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance Co.

Higher demand from long-term investors, such as insurers and pension companies, also should drive prices higher, said Gaura Sen Gupta, economist at IDFC FIRST Bank Ltd. The demand for bonds will outstrip supply in the coming fiscal year by 900 billion rupees, she said.

(Updates yields in the second paragraph)

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