Benchmark rates in 2024 are not expected to be significantly affected by India's participation in global bond indexes

 Benchmark rates in 2024 are not expected to be significantly affected by India's participation in global bond indexes

Benchmark rates in 2024 are not expected to be significantly affected by India's participation in global bond indexes

Poonam Tandon of IndiaFirst predicts that 10-year G-Sec rates would be steady in 2024, ranging from 7.20 to 7.30 percent. This is mainly because the insurance and pension industries will be the only markets for the bonds.

According to Clearing Corporation of India statistics, foreign portfolio investors purchased bonds totaling a net of Rs 127.2 billion ($1.53 billion) this year, marking the highest level of foreign inflows into Indian government bonds since 2017... Anticipations of India's inclusion in JPMorgan's Government Bond Index-Emerging Markets (GBI-EM) starting in June 2024 have led to an increase in foreign purchasing.

Market players are closely monitoring this development because between June 2024 and March 2025, inflows of $20 billion to $25 billion are anticipated into government assets that qualify for the index. Sequential inflows will occur to correspond with India's index's slow rise. Ten percent weighted. Following Russia's withdrawal from the GBI-EM index, the nation was added to it.

Without a doubt, this flow will help to finance the GDP expansion of the nation. In addition to giving corporates with a rise in capital expenditure cycle bank credit, they will assist the government in managing its fiscal and current account imbalances. Will they, however, affect rates in any way?

Not in a big way, or just briefly because the flow will veer.

In fact, international investors find Indian bonds less alluring now that they have higher interest rates. This is a result of the 10-year bond yield differential between the US and Indian governments having shrunk from around 588 basis points to about 300 basis points in 2020. This margin shrank to around 235 basis points per year when 10-year US Treasury rates crossed the five percent mark in October and November. The Federal Reserve's statement on December 13 of several rate decreases through 2024 has caused benchmark US Treasury rates to drop even more, but spreads are still too low. 2014 was the final significant inflow of FPI money into the debt markets. The Indian 10-year G-Sec was trading at 8.75 percent at the time, which was a very appealing level when looking at the spread of 642 basis points. Extremely

To be honest, the 13-year low-rate period that lasted from 2009 to 2021 was an exception. It seems doubtful that the genie of almost zero interest rates and cheap money will emerge anytime soon now that it has been sealed in a bottle.

Moreover, in the trend line below, our correlation with the US Federal Reserve's rate-setting actions is modest. India typically does not follow the Fed's lead when it lowers rates, even if it does so when it rises its benchmark. Concerns over inflation led the Reserve Bank of India to maintain the benchmark repo rate at 6.5% for a fifth straight meeting of the Monetary Policy Committee (MPC) on December 8. Thus, it seems probable that India's protracted interest rate freeze would last at least into the first part of FY2025.

Food inflation has been chronically high even as core inflation has progressively decreased. In November 2023, the CMIE's core CPI index (which excludes food, fuel and lighting, and fuel used for cars) dropped to 4.2% from 4.5% in the previous month. stays the same and evolves. Headline inflation increased from 4.9 percent in November 2022 to 5.6 percent in October 2023 due to higher food costs.

The RBI anticipates that this fiscal year's GDP will expand by 7% since economic activity is still high. Moreover, it is doubtful that the amount of government borrowing would decrease in 2025 given the goal of a 5.9% GDP budget deficit for 2023–2024.

Over the 26 years I have been following the markets, there has never been a year when government borrowing fell. Furthermore, even while capital spending in the private sector is rising, growth will still be fueled by government spending.

It is anticipated that the country's participation in the Bloomberg Global Aggregate Bond Index and other indexes would result in increased foreign inflows after it was included to the JPMorgan GBI-EM index. However, nothing is currently planned. On the flip side, in the early going, the GBI-EM index's reputational risk will limit the danger of volatility and outflows from India.

Furthermore, it will take some time to reorder or reduce the weighting since India was recently added to the index. This is because India is predicted to expand at a possibly faster pace than other emerging market countries as well as the global average. It would be difficult to lower the number of Indian bonds in the index under such circumstances. Although incremental inflows would be less due to concerns about a recession in the West, lump sum inflows will still occur.

Today's benchmark interest rates are in the neutral range, and house loan rates are also rather low at around 8.5%. Over the last ten years, the 10-year G-Sec's average yield has similarly been around 7.20 percent.

Because only the pension and insurance industries will be interested in purchasing the bonds, I predict that the 10-year G-Sec yield will stay steady in 2024, ranging from 7.20 to 7.30 percent. financial Banks won't invest in more SLRs since the system is seeing robust loan demand (if not selling new stock). Due to the slowdown in loan flows into mutual funds after the tax reform, there won't be any active participants.

Liquidity is anticipated to be limited in a high-growth economy, meaning that there won't be enough cash on hand to hold further G-Secs and that financing would be expensive.

The market will still be impacted by the supply of bonds, although there will probably be occasional windows of relief, like there was in 2023. However, timing the market is tricky. For foreign inflows, stocks will continue to be the favored asset class.