India-US g-sec yield gap at all-time low, yet there's no stopping inflows

economictimes.indiatimes.com:

interest rate differential between domestic and US sovereign bonds has shrunk to its lowest levels in at least 17 years, an occurrence that textbook theory says should drive foreign capital out of India. Overseas investors, however, are in no mood to shun the world's fastest-growing major economy.

If anything, an improvement in India's domestic and external fundamentals, along with events like the inclusion of domestic debt in global bond indices, has prompted foreign investors to pour funds here, a compressed rate differential notwithstanding.

«Academically, the narrowing of the US-India rate differential is likely to put pressure on capital flows and eventually on the currency as well. However, India is in a unique position right now. In terms of external sector vulnerability metrics, we are the lowest in more than 10 years,» said Kanika Pasricha, chief economic advisor at Union Bank of India.

«Importantly, we are actually in a position where services exports are spiking. Despite oil prices at $85-90 a barrel, we are able to manage with a current account deficit of less than 2% of GDP,» she said.

Data compiled by ETIG showed that the average Indian 10-year government bond yield so far in 2024 was at 7.12%, 291 basis points higher than the average US 10-year bond yield of 4.21% over the same period. In 2023, the average yield gap was at 326 basis points, the lowest since at least 2007, when the gap was at 332 basis points, the data showed.

From 2014 to 2022, the yield on the Indian 10-year bond was higher than