India’s local debt stock of $1.3-trillion govt bonds is the second largest in emerging markets, with bonds included in the index exceeding $400 billion, second only to China. India has the largest govt bond market in the region because of a historically large fiscal deficit for which banks were used as captive investors. Now with foreign investors picking up a large chunk of the bonds, banks will have more funds to lend leading to better rates.
“India’s relatively high yields among other index constituents can potentially convince active managers to shift to an overweight stance for these papers, along with the dedicated passive names. As it stands, positive real yields, low rupee vols, a supportive macro backdrop, strong defences against market volatility (record high reserves stock) and ongoing fiscal consolidation are key factors that make IGBs (Indian govt bonds) attractive for investors. In the near-term, we don’t expect these inflows to stoke material swings in the rupee or liquidity, courtesy the central bank’s active presence to minimise volatility,” DBS Bank senior economist Radhika Rao said in a note.
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