Rajat Mehrotra
financial and economic experts
As soon as investment in India is discussed, the thought of stock market, mutual funds and bank FD comes to the mind of most people, but there is a very important part of the Indian financial system which has been relatively less discussed over the years. This part is the bond or debt market of India. Today the market is going through a historic change that may impact the government, industry, investors and the entire economy in the years to come.
Indian government bonds have become more accessible to global investors in recent years. Some government bonds of India are included in major global bond indices. As a result, pension funds, insurance companies, sovereign wealth funds, central banks and global asset managers from around the world are attracted to the Indian debt market. This is not just an inflow of foreign capital, but an important step towards globalization of the Indian financial market.
According to various estimates, India’s total bond market is believed to be worth more than Rs 230 to 250 lakh crore. Government securities have the largest share in this, while the corporate bond market is also gradually expanding. Despite this, the share of foreign investors in the Indian bond market is still relatively low compared to many developed and emerging economies. This is why experts are considering this as the next big opportunity for India’s financial sector.
India’s government bonds have already been included in major global indices such as JPMorgan Government Bond Index-Emerging Markets and Bloomberg Emerging Market Local Currency Index, although the process of full inclusion in some other global indices is still dependent on various operational and regulatory reforms. Yet it is clear that India is increasingly becoming an important destination for global debt investors.
The first impact of increasing participation of foreign institutional investors is on the demand for bonds. When the number of investors buying a bond increases, its price increases and its yield decreases. This situation can benefit both the government and the companies, as they get the opportunity to raise capital at relatively low costs.
If there is positive pressure on the government’s borrowing costs, investment in infrastructure, rail, roads, energy, water management and manufacturing may gain momentum. India is moving towards joining the major economic powers of the world in the next few years. In such a situation, availability of long-term capital for development projects will be extremely important. A strong bond market can play an important role in meeting this need. The impact of this change will not be limited only to the government or companies.
Mutual fund investors can also get benefits from this. This could be a positive opportunity especially for those investing in investment instruments like Gilt Funds, Target Maturity Funds, Corporate Bond Funds and Bharat Bond ETFs. If bond yields fall, prices of bonds already issued rise, which may see an improvement in the NAV of many debt funds.
Another possible impact of foreign capital flows could be on the Indian rupee, when foreign investors buy Indian bonds, they require rupees, thereby increasing the demand for the Indian currency, although it would not be fair to say that this will necessarily strengthen the rupee, as the direction of the currency depends on a number of factors including oil prices, trade deficit, global dollar trends and the policies of the Reserve Bank of India.
While foreign investment inflows may be helpful in reducing pressure on the rupee and improving external stability, there is another side to this story, which cannot be ignored. Foreign investors come in search of opportunities and can also exit rapidly if risks increase. If interest rates rise in the US, fears of a global economic recession arise or geopolitical tensions increase, foreign investors may withdraw funds from the Indian bond market. In such a situation, a fall in bond prices and an increase in yields may be seen. (These are the personal views of the author)
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