If reports and statistics are to be believed, then yes! India currently has a conducive environment for bond investments. Let’s discuss it a little more.
Investments and Inflation
India has been at its economic best in recent years. With a promise for domestic and international investors, India is thriving across all sectors. Of course, there’s room for improvement. But with the current pace and promise, the already fifth-largest economy of the world is cruising towards becoming the third-largest one!
Speaking of bonds in particular, March 2024 witnessed an FPI inflow of Rs. 3,316 crores in the debt market. The investment followed a much more gigantic investment of Rs. 22, 419 crores in February 2024. FPIs (Foreign Portfolio Investors) have been making huge average monthly debt investments since September 2023. But what’s the sudden reason for this surge in the Indian bond market?
COVID, as we know, caused a global economic slowdown. Many massive, and otherwise promising economies crippled after being exposed to the uncertainties of COVID. Many are yet struggling to stay afloat. Speaking of the bond market, the last three years were dotted with several challenges. One of the most significant challenges included the rising inflation driven by supply disruptions and oil price volatility coupled with a period of global Central Bank rate increments.
However, the tough tide seems to be gradually subsiding. Many positive factors are finally making 2024 a year of take-off for the Indian bond market!
Global policy rates reached their highest marks in 2023. However, central banks are attentive to inflation risks. That currently puts them on pause.
Once the banks feel comfortable and somewhat assured about the sustained lower inflation in the future, they will start cutting rates. These cuts will depend on the actual inflation graph. Once we step out of the shadow of COVID disruptions, the inflation rates will return to the Central Bank’s target.
This will refer to good news for all asset classes. However, on the other hand, although the massive inflation rates have reduced significantly, inflation is still higher than the comfort zone of central banks.
Growing GDP
India’s GDP rate in Q3FY24 came in as a delightful surprise. It reached 8.4 per cent against the estimated 7.3 per cent. On the other hand, as domestic growth continues to be promising and strong, RBI won’t have a reason to cut the policy rate, at least as of now.
Inclusion in JP Morgan Global Index from June 2024
Another boost for the Indian bond market came from the inclusion in the JP Morgan global index, which will be effective from June 2024. It is projected to bring up to USD 30 billion into India.
FPI inflows are another factor that we’ve already seen above. The impact of these foreign inflows is an excess demand for G-secs particularly with the government consolidating the fiscal deficit to 5.1 per cent of GDP in FY25, lowering the gross borrowing. It may contribute to the potential bond market rally resulting from central bank rate cuts. All in all, one can say that domestic factors are optimistic for the bond market when compared with the global situation.
Prices in Control | Stable Rupee
Another noteworthy fact is that the oil prices have come under control and the rupee has become relatively stable. Of course, global factors have their say, due to which inflation will struggle to decline. On the other hand, global debt to GDP is much higher than normal. And as if that wasn’t enough, the perpetually disturbed geopolitical situation with wars across critical regions can also impact significantly.
Accordingly, RBI may have to wait for more noteworthy cues to cut the rates. It may follow the Fed on monetary policy easing in spite of robust domestic factors. If the easing takes place in 2024, the yield will move lower with the bond.
In a nutshell, robust economic growth, economic expansion reducing credit risk in Indian government securities, and the influx of huge investments make the bond market situation a favourable one. Hence, if you’ve been considering investing in bonds, you may want to go for it. However, you should invest after expert consultation and careful consideration of your financial goals.
As for the platform to invest in bonds, you have Altifi. Sign up with us and start investing in bonds.
Disclaimer: The contents of this article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.