Economic Optimism And The Indian Rupee Bond Market | srei
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Economic Optimism And The Indian Rupee Bond Market

According to figures from the Securities & Exchange Board of India, foreign investors pulled out a net $8 billion out of Indian debt in 2013, after adding money every year since 2006. This year however, Indian bonds have witnessed a turnaround with foreign investors purchasing bonds worth 13 billion. It is also interesting to note that 9 billion of the total bonds purchased have been purchased in the last three months. During early April, Yields which move inversely to prices witnessed a fall from around 9.1% to 8.67%.However, yields on rupee debt as compared to the Ten-year U.S. treasury bonds for example are still attractive at this level.

Interest rates are partly determined by the stability of the currency on the foreign exchange and speculations on the economy. High-interest-rate currencies appreciate faster than low-rate ones and as far as the rallying of Indian bonds are concerned they depend on three factors: Low interest rates in developed countries, improvement of the Indian economy and stability of the rupee. Even though there is a foreign appetite for rupee denominated debt, India has placed many restrictions on foreign investment in rupee denominated bonds. Indian government rupee bonds almost worth 20 billion have been grabbed by foreign investors. According certain regulations this is also the maximum amount they are allowed. There have also been reports suggesting that Reserve Bank of India allowed them to buy another $5 billion in government bonds with some conditions. Long-term foreign investors like sovereign wealth funds have a separate quota, of around $5 billion of government bonds.

Global investors believe that the worst may be over for the Indian economy and are optimistic about taking more risks. Revamping the economy and cutting down unnecessary costs is what the newly appointed Indian government is trying to achieve. The various policies such as ‘PRADHAN MANTRI JAN DHAN YOJANA’ and ‘MAKE IN INDIA’ have been formulated to achieve this very goal. The government has said very clearly that one of its aims will be to hold its budget deficit at 4.1% of gross domestic product. The current account gap which is a calculation of a country’s foreign transactions has narrowed to 1.7% of GDP as compared to last year. The large gap of 4.8% last year is one of the main reasons why the rupee went crashing down to a new low. The national economy has recovered from such a major currency fluctuation and foreign investors find this new found stability attractive for investment purposes.

The improving economic and political scenario is a sign of good things to come for Indian debt. As a part of the offshore rupee bond program the World Bank has issued $160 million in Indian rupee-linked bonds.  Developing a substantial domestic bond program and no sudden surge in inflation is what is required to deepen India’s capital markets