Indian Bond Markets to See High Inflows as Fed Rate Cut Boosts Attractiveness: SBI Report

The State Bank of India, based on a report, states Indian bond markets will make easy money in the coming months with the latest rate cuts by the United States Federal Reserve having enhanced the attractiveness of Indian bonds. The rise in differential interest rates between India and other economies is likely to spur bond investment, helping the fiscal deficit target end.
Survey End

According to the SBI report, the major inflows will not only boost the bond markets but also give additional liquidity to the Indian government. This infusion will keep the government on the track of fiscal deficit.
“The bond markets may see relatively better inflows due to rate differentials’ trajectory continuing and the Government of India sticking to lower fiscal deficit targets,” the report noted.

RBI moves away from the influence of the US Fed

The Reserve Bank of India is increasingly taking a more independent route of merely not being a mimic of the U.S. Federal Reserve but slowly shifting towards developing a robust system that will take care of India’s requirements, majorly supported by domestic demand and supply dynamics.
The SBI report drives this point home stating, “RBI looks more set to stay away from the ‘Follow the Fed’ mentality permanently having created a robust and resilient Indian financial ecosystem.”.

While foreign inflows usually mean more liquidity, the report states that the Indian Rupee (INR) may face some downward pressure because India needs to stay competitive in trade. Even as the USD is weakening, some changes in the USD/INR rate would have to be made so India remains competitive in the marketplace.
“The USD/INR may face some gravity of the pull so that the country can maintain its competitiveness in the trade front,” added further.
Impact of Rate Cuts by US Fed on Future Calls by RBI

Although the RBI has unmistakably begun separating its policies from the US Federal Reserve, it can still be influenced by the Fed’s sharp rate cuts in its own domestic monetary policy, especially on the inflation side. The reduced interest rates in the US would affect India’s domestic level of inflation through international price level changes.
According to SBI report, “Minutes of the last MPC meeting released from RBI reflected that discussions had taken place regarding possible consequences of Fed rate decisions. However, the RBI is likely to be more independent in its rates’ decision for India.
Conclusion:

This strategy will result in maintaining highly liquid Indian bond markets with high foreign inflows at a differential interest rate, favorable to RBI, with respect to their needs. On the other hand, INR might have some adjustments downward against the USD to keep global trade competitiveness intact. Hence, the global investor finds India’s bond market an attractive option by maintaining fiscal and economic policies.