In the last four months, there has been a significant uptick in demand for Indian bonds, resulting in the yield on the Indian 10-year government bond dropping to a low of 7.006%, the lowest since June 2023. Market indicators suggest the yield is poised to hit 6.90% in the near future.
Several factors contribute to this trend, including improved liquidity conditions, a global decline in bond yields, increased Foreign Portfolio Investor (FPI) inflows, anticipation of a Federal Reserve rate cut, a cut in LPG prices, and the inclusion of Indian government securities in the Bloomberg Emerging Market Local Currency Government Index.
The strong demand for Indian bonds has outpaced the equity market’s performance this year, signaling a preference for fixed-income securities. Bond prices and yields have an inverse relationship, with rising bond prices leading to lower yields.
**Factors Driving the Surge:**
1. **FPI Inflows:** FPIs continued their investment in March, injecting ₹3,316 crore into debt markets, following a substantial ₹22,419 crore investment in February. The monthly debt investments by foreign portfolio investors have notably increased since September 2023.
2. **Global Index Inclusion:** The inclusion of G-Secs in Bloomberg’s emerging market local currency index and JPMorgan’s inclusion of Indian bonds in its emerging market debt index have contributed to FPI demand.
3. **Potential Future Inflows:** UBS Global Strategy suggests that with JPM GBI-EM’s benchmarked AUM of $236 billion, India could attract about $25 billion of foreign portfolio flows over ten months starting June 2024.
4. **Bloomberg’s Phased Inclusion:** Bloomberg’s phased inclusion of Indian bonds in its Emerging Market Local Currency Index from January 31, 2025, is expected to attract additional flows associated with these indices.
5. **FTSE Russell Review:** The review for potential inclusion of local bonds in FTSE Russell’s EM bond gauge is due later in March.
6. **LPG Price Cut:** The recent cut in LPG prices by the government led to a downward trend in the domestic 10-year benchmark yield, signaling an expected decrease in inflation.
7. **Surplus Liquidity:** Government spending has resulted in surplus liquidity in the banking system, with the RBI conducting variable-rate reverse repo auctions to absorb liquidity.
8. **Robust Economic Growth:** India’s GDP growth of 8.4% in the December quarter, surpassing expectations, and the overall robust economic performance have reduced credit risk in Indian government securities.
9. **Drop in US Bond Yields:** The decline in 10-year US bond yields, coupled with expectations of a potential rate cut by the Federal Reserve in June, has boosted demand for Indian bonds.
As traders await key economic indicators, including US inflation data and India’s retail inflation data, the bond market continues to attract attention amid these favorable conditions.
