US Fed Rate Cut Pivot Could Boost India's Foreign Inflows, Fund Manager Says

(Bloomberg) -- Foreign flows to India’s $1.3 trillion sovereign bond market are likely to get a boost once the Federal Reserve and other central banks start cutting interest rates, according to T. Rowe Price Group Inc. 

The “spread-yield advantage” for Indian bonds is likely to increase over core markets when the global monetary authorities start easing their policies, said Leonard Kwan, a fund manager at T. Rowe Price in Hong Kong. “Classically, the RBI cuts at a lower amplitude than a lot of the other markets.” 

India’s faster economic growth may prompt the central bank to ease policy at a slower pace, a move that’s likely to keep the nation’s bond yields higher than emerging-market peers. The 7% yield on the nation’s benchmark 10-year bonds is one of the highest in Asia, and compares with 4.3% on US Treasuries.

Central banks cutting interest rates, “would be one thing I’d be looking out for to catalyze more flows,” Kwan told Bloomberg’s Menaka Doshi in an online discussion on the outlook for Indian bonds after their debut on JPMorgan Chase & Co.’s emerging market index from Friday. 

Global funds have poured close to $11 billion into index-eligible bonds since JPMorgan’s September announcement. The US bank expects $20 billion to $25 billion to come in over the next 10 months, raising foreign ownership to 4.4% from 2.5% currently. 

While JPMorgan added India to its watchlist for inclusion in the emerging market bond indexes in October 2021, talks hit a stalemate as New Delhi balked at tax changes for foreigners to trade on international platforms such as Euroclear. 

Those concerns, however, were overridden by investors’ need for more options in EM sovereign debt.  

The fact that the government decided against making changes, “tells you that India is not looking for flows,” Howe Chung Wan, head of Asian fixed income at Principal Global Investors, also said on Friday. “It tells you that global investors want exposure rather than Indian government being reliant” on them, he said. 

--With assistance from Menaka Doshi.

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