Foreign Investment Pours In, Revitalizing India's Bond Market
India's bond market has shone brightly this month, with foreign capital flowing back in. According to data from the Clearing Corporation of India, since December, foreign investors have net purchased Indian bonds worth 64.72 billion rupees (764 million USD), dispelling the gloom of November. This marks the first continuous net inflow of overseas funds since India was included in the JPMorgan Index.
Market Expects Central Bank to Maintain Rates but Enhance Liquidity
While the market anticipates that the Reserve Bank of India will keep interest rates unchanged at its December 6 meeting in response to inflation above the target level, liquidity management has become a focal point. Analysts suggest that the central bank might adopt measures such as bond purchases or reducing the cash reserve ratio to release more liquidity and inject vitality into the economy.
India's economic growth slowed significantly in the last quarter, putting greater pressure on the central bank. The market is calling for action to maintain stable interest rates and to support economic recovery by enhancing liquidity.
Weak Economic Data Pushes Bond Prices Up
After the release of weak GDP data, Indian bond prices rebounded, with the 10-year benchmark yield falling to its lowest since February 2022. This performance reflects expectations for enhanced liquidity and policy easing. However, foreign capital had significantly exited India's bond market in November due to Trump's tariff threats raising the USD and US bond yields.
The Role of USD Trends in Long-term Outcomes
Although short-term liquidity measures might depress local bond yields and attract more capital inflows, the long-term performance of the USD remains a crucial variable. The strength of the dollar may not persist indefinitely; should it retrace, it will create room for rate cuts and additional forex reserve accumulation by central banks in emerging markets like India.
Policy Directions and Global Factors Acting in Concert
As the Reserve Bank of India's decision day approaches, the market remains keenly attentive to any policy adjustments. Whether the trend of foreign capital returning and the bond market recovering can continue will depend on the central bank’s specific actions and changes in the global market environment. In the future, the direction of the USD, liquidity policies, and economic growth trends will collectively influence the performance of India's bond market.
