Should You Buy Indian Bonds?
Mumbai, India
JP Morgan added Indian government debt to its biggest emerging markets index, representing a huge milestone of global institutional investors recognizing Indian debt as a legitimate long-term hold. Not only is India gaining more notoriety as seen with the G7 conference or trade negotiations, the country is set to see a $40B (Rs. 3.2T) inflow amid a huge boom in IPOs.
As Indian sovereign debt enters the international conversation as a serious contender for the first time, here are the bullish and bearish outlooks.
Bullish
India’s current account deficit (difference between exports and imports) set to stand at 1.2%, indicates that India is able to finance itself through its exports, signaling a healthy economy. Additionally, the planned reduction in the fiscal deficit from 5.8% to 5.1% shows a commitment to fiscal discipline. These factors combined can make investors bullish on Indian bonds because they suggest economic stability and a lower risk of default. A healthier economy with sound fiscal policies generally leads to higher investor confidence, which can drive up demand for Indian bonds, potentially resulting in lower yields and higher bond prices.
Yields at 6.5% are highly attractive to investors especially compared to other EM countries like Mexico and Egypt which have highly volatile currencies, making conversion back into dollars less guaranteed. Given RBI intervention, the rupee is the most stable currency against the dollar compared to any other EM currency.
Overall, EM performs well during risk-off environments with rate-cutting cycles which is expected to start in the US as soon as September.
Currency volatility matters as most investors have to convert their earnings back to dollars. However, clearing house data shows that Mexico had an oversubscribed $7.5B issuance with sovereign bond indices gaining nearly 10%. Egypt had a $2B bond issuance that was 8 times oversubscribed resulting in $16B of demand for a single issuance. India, for all of 2023 including the last 3 months after JPM announced, had $7.2B of bond inflows (Rs. 600B).
This is considering India has a 75% larger GDP than the 2 countries combined. GDP matters greatly as a country’s growing wealth signifies their ability to pay back debt.
So why would investors still be hesitant to invest?
Bearish
For investors to be bearish on Indian debt, they do not need to be pessimistic about India’s ability to service its debt, but simply less optimistic about Indian debt than other similar options, including U.S. Treasuries.
The primary risk all EM debt faces is remaining attractive in a high-rate environment. As inflation consistently prints above target in Western central banks, rates are less likely to be cut, meaning investors can receive attractive yields in U.S. Treasuries without risking the political and economic volatility present in India.
Indian debt also suffers from the poorest ratings of any BRICS nation (except Russia, which is under sanctions); Fitch gives India a BBB-, Moody’s is Baa3, and S&P is BBB- with a positive outlook.
India has never defaulted on its sovereign debt payments, but its debt-to-GDP ratio has also never been as high as it is today, starkly rising after COVID.
