On top of JPM flows, Indian debt to grab EM spotlight as US cuts rates
inclusion in a JP Morgan bond index, but a senior Citi executive feels that number may be topped as the Fed is likely to start cutting rates soon, turning Indian debt into a favourite within the emerging markets pack.
“The last US inflation reading was softer than what the market expected, so we actually think that the Fed might commence with the rate cut cycle from September and could maybe do three rate cuts this year itself,” Aditya Bagree, head, markets, Citi — India & Indian subcontinent, told ET in an interview.
“What generally does happen with US rate cuts is that EM bond funds attract more investment. As investments increase in EM bond funds, a part of that – almost 10% of that – will now get allocated to India. So, this $2 billion number can increase because of that,” he said.
Elaborating on why Indian bonds would draw in an increasing share of the EM investment pool, Bagree said that local sovereign debt presented one of the “best volatility-adjusted carry trades” that exist in the region.
Further, the resilience of the Indian rupee in a volatile global environment and a favourable demand-supply dynamic for local debt have significantly increased the scope for more foreign investment flowing here, even as visibility on local rate cuts is low at present, he said.
Despite a recent flurry of global interest in Indian debt, foreign investment in local central government bonds currently stands at only Rs 2.6 lakh crore (around $32 billion) out of the total outstanding amount of Rs 105.31 lakh crore (around
