Indian bond yields close in on US as fiscal dynamics shift
The difference between the yields of Indian and American Treasury bonds has reached its lowest level in two decades, potentially leading to capital outflow from the Indian debt market, according to calculations by Bloomberg.
The yield on Indian bonds is steadily decreasing, driven by the country's strong fiscal position, declining inflation, and expectations of interest rate cuts, according to DBS Bank Ltd. This trend contrasts with the situation in the United States, where recent tax cuts have raised concerns about the national debt level. The difference is so marked that billionaire banker Uday Kotak is contemplating whether the yield on Indian bonds could eventually fall below that of American bonds.
"This compression is likely to hold given a favorable change in India’s rates backdrop at this juncture, while investors’ worries over US’ fiscal strains are still to be addressed," noted Radhika Rao, senior economist at DBS Bank, in a report.
Capital inflow despite decreasing yield advantage
Foreign investors have injected a net $2.3 billion into Indian rupee-denominated debt this year, even though the current quarter experienced an outflow of about $4 billion. While a shrinking yield advantage is typically negative for emerging markets, India's robust macroeconomic fundamentals may continue to attract some capital inflow, according to traders.
"Though the narrowing spread normally reduce the fund flow to Indian market, this time with sound fiscal position and less riskier currency dynamics we may still get flows in debt market," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.
Indian bonds are becoming more integrated with global markets following the inclusion of local Treasury bonds into key emerging market indices, including those managed by JPMorgan Chase & Co. The yield on 10-year Indian bonds currently stands at 6.20% annually, while American bonds yield 4.60%, resulting in a difference of 1.60%.
Outlook for the Indian bond market
Billionaire Uday Kotak is considering the possibility that, in the future, the yield on Indian bonds may fall below that of American bonds. According to him, this mainly depends on relative inflation, risk premium, confidence, and liquidity for global and domestic investors in both countries. His comment comes as the difference in yields reaches the lowest point in recent memory.
Indian Treasury bonds are also becoming more attractive due to the country's strong fiscal position. The Reserve Bank of India (RBI), under the new leadership of Governor Sanjay Malhotra, recently enacted the first rate cut since 2020, which led to an increase in the prices of short-term Indian bonds.
Analysts point out that although the loan growth rate in Indian banks is the slowest since 2022, Tycoon Birla achieved the cheapest issuance of rupee-denominated bonds in five years. This indicates growing confidence in the Indian debt market, despite the shrinking spread compared to American securities.
