Global Funds Shift Focus to India's Longer-Maturity Bonds Amid Anticipation of RBI Policy Shift

Key Takeaway

• Global funds shift focus to India's longer-maturity bonds, betting on RBI's future less hawkish stance and index inclusion.
• Anticipated RBI rate cuts between October-December align with inflation targets, driving investment in bonds due in 11-to-15 years.
• India's bond market stability and expected $40 billion inflows from JPMorgan index inclusion highlight its growing appeal to global investors.

Global Funds Eye Indian Bonds

Global investors are increasingly focusing on India's longer-maturity bonds, driven by expectations that the Reserve Bank of India (RBI) will adopt a less hawkish stance in the future. The shift towards these securities is also influenced by their upcoming inclusion in JPMorgan Chase & Co. indexes. Data from Bloomberg indicates a significant change in the allocation of foreign money towards local bonds, with the proportion invested in bonds due in 10 years or more rising to 17% from 11% in September. Conversely, investment in debt maturing in five years or less has decreased by 10 percentage points to 44% over the same period. Jerome Tay, a fixed-income fund manager at abrdn Plc in Singapore, highlighted the preference for bonds due in 11-to-15 years, attributing it to declining inflation and the anticipation of the RBI easing its tight monetary policy.

Anticipation of RBI Policy Shift

The central bank's expected pivot towards an easing policy is a key factor behind the global funds' strategy. Despite delays in predictions for when rate cuts will commence, they are anticipated to start between October and December, according to Bloomberg surveys. This forecast aligns with the annual inflation rate dropping below 5% in March, moving closer to the RBI's target of 4%. RBI Governor Shaktikanta Das has stated that policy easing would only be considered if inflation consistently hovers around the 4% mark. Investors, expecting rate cuts, are buying longer-maturity bonds to secure potential returns. Abhay Gupta, a strategist at Bank of America Corp. in Singapore, noted the challenges of holding shorter-term bonds due to the RBI's hawkish stance and the low carry versus US dollar funding costs.

Index Inclusion and Market Stability

The inclusion of India's bonds in JPMorgan’s flagship emerging-market index in June is anticipated to attract significant inflows, with estimates from Goldman Sachs Group Inc. and others suggesting up to $40 billion could be directed towards Indian securities. This move is expected to bolster the appeal of Indian debt, which has demonstrated resilience amid fluctuations in U.S. Treasuries. A Bloomberg analysis revealed that Indian bonds are among the least affected in Asia by Treasury swings, further enhancing their attractiveness to investors. Since the announcement of the index inclusion, global funds have invested $8 billion in Fully Accessible Route securities, with projections of an additional $30 billion in inflows upon inclusion.

Government and RBI's Supportive Measures

The Indian government's commitment to reforms and fiscal discipline, along with the RBI's strategic interventions to maintain currency stability, has underpinned the resilience and attractiveness of Indian financial assets. The ongoing national elections and the potential for Prime Minister Narendra Modi's third term are closely watched by investors, given their implications for the continuation of favorable policies. The RBI's cautious approach, including selective bond buybacks to manage liquidity and prevent significant rupee appreciation, reflects a broader strategy to balance economic growth with inflation control.

Street Views

• Jerome Tay, abrdn Plc (Bullish on longer-maturity Indian bonds):

  "India’s bonds due in 11-to-15 years are still the favored part of the curve... It’s really backed by the whole idea that inflation is coming down and the Reserve Bank of India backing off its tight monetary policy."

• Abhay Gupta, Bank of America Corp. (Neutral to Bullish on longer-duration Indian bonds over shorter ones):

  "I believe investors rather prefer the 10-year or longer since RBI’s hawkish stance and low carry versus US dollar funding costs (negative net of taxes) make it difficult for clients to hold on to the shorter end."