Indian bond markets may get high inflows as Fed rate cut has made India's bond market attractive: SBI report
Sep 20, 2024
New Delhi [India], September 20 : Indian bond markets may witness high inflows in the coming months as the fed rate cut decision has could spark better inflows due to rest rate difference between India and other countries, highlighted a report by SBI.
The surge in the flows of bonds to Indian markets will also provide a large room to the government of the country to maintain its fiscal deficit targets because with the surge in Inflows of the bonds, the liquidity in the country will also surge.
"The bond markets may witness comparatively better inflows due to rate differentials trajectory continuing (and GoI sticking to lower fiscal deficit targets)" said the report.
Additionally, the report noted that the Reserve Bank of India (RBI) is moving away from following the US Federal Reserve's decisions. The central bank of the country now focusing more on India's own financial needs and creating a stable and strong financial system. This system as per the report is being supported largely by the domestic demand and supply within the country.
"RBI looks more set to depart from the 'Follow the Fed' mentality for good, having created a robust and resilient Indian financial ecosystem" added the report.
However, with the surge in the liquidity from the markets like US, the report noted that the Indian Rupee (INR) may face some downward pressure to help maintain India's trade competitiveness, even though the US Dollar (USD) has been weakening recently.
This means that the exchange rate between the USD and INR could see some adjustments, allowing India to stay competitive in global trade despite the Dollar's current weakness.
"The USD/INR however may undergo some gravitational pull to sustain the country's competitiveness on trade front" the report noted.
The report also added that the aggressive rate cut by Federal Reserve has important bearings on RBIs decision on interest rates. Although this is not explicit, fall in dollar rates impacts the domestic inflation through international prices.
The recent minutes of the RBI MPC do indicate discussions on possible Fed rate actions. RBI may disassociate from the interest rate developments in the US and may take an independent view of the domestic rates based on evolving conditions.
Overall, while bond markets could benefit from stable financial policies, the exchange rate might shift to keep India's economy balanced in the international market.
