Driving Forces Behind India’s Bond Demand

For the past four months, the demand for Indian bonds has been notable. On Monday, March 11, 2024, the yield on the 10-year government bond touched 7.01%, its lowest level since June 2023. Furthermore, there is a strong signal that the yield is expected to hit about 6.90% in the near future. Government bond yields are the benchmarks used to price bonds issued by companies. It is to be noted that the bond prices and yields have an inverse relationship. When bond prices drop, yields increase, and vice versa.

Factors Attributing to the Growth of the Bond Market

There can be several factors that must be causing the demand, such as:

• Inflows continue: In March 2024, Foreign Portfolio Investment (FPI) inflows continued as they invested about ₹3,316 crore in debt markets so far. In February, about ₹22,419 crore investment was made. Foreign portfolio investors’ average monthly debt investments have seen a remarkable increase since September 2023.FPI demand for Indian government bonds was attributed to the inclusion of JPMorgan’s inclusion of Indian bonds in its emerging market debt index, which was followed by G-Secs in Bloomberg’s emerging market local currency index.

  According to a report by UBS Global Strategy, with the JPMorgan Government Bond Index-Emerging Markets’ (GBI-EM) benchmarked AUM of $236 billion, India could potentially record almost $25 billion of foreign portfolio flows, phased over the 10-month period starting in June 2024.

  Similarly, Bloomberg’s phased inclusion of Indian government bonds in the Bloomberg Emerging Market Local Currency Index and related indices, which starts from January 31, 2025, could potentially attract more foreign portfolio flows associated with these indices. Additionally, the review for the possible inclusion of local bonds in the FTSE Russell’s EM bond index is scheduled for later in March.

• LPG price cut: This week, the Indian government announced a cut in LPG prices, expecting a decrease in inflation. On Friday, March 8, 2024, the government of India announced a ₹100 reduction in the price of LPG cylinders. This news was followed by the domestic 10-year benchmark yield opening in a downward trend.

• Liquidity enters a surplus state due to government expenses: As of March 7, 2024, the system liquidity closed at a marginal deficit of ₹0.09 trillion. Government spending has pushed liquidity in the banking system into a surplus state, marking the first instance since December 6, 2023. Due to this, the RBI conducted a series of Variable-Rate Reverse Repo (VRRR) auctions, mostly of overnight tenures. They absorbed a cumulative amount of ₹2.2 trillion. Also, the RBI arranged a 15-day Variable Rate Repo (VRR) auction worth ₹500 billion on March 7, 2024, Thursday. This is to partly compensate for the maturity of an earlier VRR auction.However, on Thursday, excise duty outflows and VRR maturity took system liquidity to a marginal deficit. According to the ICICI Global Markets, the liquidity conditions could reduce this week, with the RBI anticipated to take delivery of the sell/buy swap worth ₹5 billion. This is expected to invest ₹400 billion into the banking system. However, it added that by the end of the week, advance tax outflows are expected to start, tightening liquidity conditions.
• Robust economic growth: It is well-known that the country’s GDP increased by 8.4% in the December quarter, exceeding expectations of 6.6%. This impressive growth raised the second estimate of FY 2024’s growth to 7.6%, anticipating a strong momentum in economic recovery.This strong expansion resulted in a drop in the credit risk of Indian government securities. The government plans to reduce the fiscal deficit for the 2024–2025 financial year to 5.1% from the revised 5.8% in FY 2024.

• Drop in US bond yields: Another factor that is adding to the increase in demand for Indian bonds was the drop in 10-year US bond yields, which dropped from 4.3% to 4.08%.

Conclusion

Overall, the performance of the debt market in India has surpassed that of the equity market this year so far.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.