US rate cuts can spur inflows into Indian debt: Citi Exec
JP Morgan bond index, but a senior Citi executive said that number may be topped as the US Federal Reserve is likely to start cutting rates soon, turning Indian debt into a favourite within the emerging markets (EM) 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.
«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% — will now get allocated to India. So, this $2 billion number can increase because of that,» he said.
Bagree said the 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 ₹2.6 lakh crore (around $32 billion) out of the total outstanding amount of ₹105.31 lakh crore ( $1.3 trillion).
«One factor obviously is the passive inflows that will come in because of the JP Morgan index inclusion, but
