Global bond index inclusions to boost Indian bond market, drive foreign flows: Lakshmi Iyer

Economic Times

25-04-2025

Agencies
So, if I draw that entire band together, we think that impending inclusions also as and when, it is not that it is going to be very near-term, but when that happens that will definitely propel yields lower.
"I will take you back to the RBI policy where the governor did mention that there are signs of rural and urban consumption pickup, so we are actually looking at fuelling an inward facing sort of sectors pump priming the economy right now and, of course, the BFSI, the banking, and financial services sector space or the interest rate sensitive space and not so much so the external looking sectors which we used to hinge upon for our growth outlook," says Lakshmi Iyer, CEO, Kotak Investment Advisors.
First of all, the Indian bond yields that is falling and I believe that it is now hovering around those lowest levels since December 2021. Another 50 basis points of rate cut is expected from RBI. But with this, how much more the bond yields may fall further? What is the outlook on that front?
Lakshmi Iyer: So, clearly the kesari mode in equity markets is getting, I would say, counterbalanced with the green platter that we are seeing on the fixed income side. And clearly a couple of key triggers, just not the rate cut that we saw, but also the RBI minutes which clearly revealed a more than consensus view in terms of continuing this path of easing. So, if you actually draw a dove and hawk meter of the RBI MPC members, the tone is more tilted towards a dovish or a neutral outcome and that is clearly bond market supportive. Of course, notwithstanding maybe near-term consolidation.Plus, the RBI open market bond purchases including this month that is underway, all that is pointing out towards a sustained lowering of bond yields in the months ahead.
Let me just touch upon the spreads as well because on the other hand the expectations of a rate cut from the US that has narrowed and with that, the spread between India and US bond yields have also fallen. How one should read this for the Indian bond market? Will the lower spread really means that the lower traction for the Indian bond market going ahead?
Lakshmi Iyer: So, two points to note. In the US, US treasury yields are being sold by foreigners and when I say foreigners I am referring to countries like China, whereas in India it is the reverse, it is the Indian domestic institutions, pension funds, insurance companies, etc, which are supporting the bond programme of the Government of India.
So, that is something which we cannot undermine. And secondly, if you look at the US narrative, very recently some of the Fed governors have been singing a dovish hymn saying that if the data starts pointing or looks slightly favourable, we could see rate cuts in the US as early as June.
So, while the bond spreads have narrowed, no two ways about it, but does that mean that incremental downward movements for Indian bonds may not happen that is very unlikely because we could expect even US yields to start heading towards the 4% mark and currently we are at 4.35 odd percent.
Just want to understand how tariffs come into play here and how should we factor in that metric as well because while the uncertainty around tariffs still remains, the global growth outlook is weakening. Many of the agencies have cut their global growth target along with India's growth targets as well. On the back of this and amid all the noise that we are hearing externally, do you still believe that India is poised to grow above the 6% mark for FY26?
Lakshmi Iyer: So, I would say the reverse. The world is growing at about 3% including or after accounting for the slowdown and the mark cut in the global growth outlook.
I will take you back to the RBI policy where the governor did mention that there are signs of rural and urban consumption pickup, so we are actually looking at fuelling an inward facing sort of sectors pump priming the economy right now and, of course, the BFSI, the banking, and financial services sector space or the interest rate sensitive space and not so much so the external looking sectors which we used to hinge upon for our growth outlook. So, yes, definitely, we could look at probably some more slowdown and probably the GDP growth may not be as what we have highlighted or pencilled in, but again, one eyed man in the land of the blind is still very-very potent and as I said, even if we are at 6% plus growth rate, that is still 100% more than what the world is growing. So, that clearly will be a critical factor and mind you the global tensions or the global frictions has been one of the key reasons why we actually did a stance change and that is something which is very-very critical even in the months ahead.
Let me just touch upon the INR because that is seen to be appreciating or stabilising now and the news report suggests that the RBI's net short position is in USD has hit a record high in the month of January. Given that the dollar is now weakening, what is your expectation like directionally in terms of the dollar and the INR? Is there an upside risk for rupee?
Lakshmi Iyer: So, the dollar index actually from peaks of 109 went down to almost low of 98 and now it is kind of in the 99 odd region. And with the fact that it has already seen such a sharp correction and Asian currency specifically if you talk about INR has also seen some appreciation, this is the time to take a little bit of a breather. Of course, RBI has done buy-sell swaps to ensure that they are ensuring no disruptive movements on the currency on either sides. At the current juncture, our view is that if the dollar or the USD-INR probably goes up to say 84, 84.5 levels, at that point in time we could see some sort of dollar buying happening and conversely, if it goes past and depreciates beyond 85.5, 86, there again we could see some sort of stability measures needed. For now, the 84.5 to 85.5, 86 kind of a range should be something which we will see like a rupee, rupee-and-a-half of sideway movement, we are not expecting anything materially disruptive happening on the currency in the very near term.
Also help me understand that recently Indian bonds were also introduced in many of the global benchmark indices, you have JPMorgan, Bloomberg. FTSE inclusion is yet to happen. How do you read these updates amid the uncertainty and will the bond related flow remain intact going ahead?
Lakshmi Iyer: For sure, when there is a risk off and risk on kind of a sentiment, we have seen this in the past 12 months also that fixed income returns have been pretty positive experience for the investors and the inclusions which have already happened, that is already leading to some sort of a benchmark hugging mode for foreign investors. The impending inclusions, as and when they happen, obviously we cannot really pencil in a timeline for that, will definitely continue to be a strong catalyst. We also need to keep one thing in mind that RBI has been conducting bond purchases which also has acted as a very strong anchor for bond yields and that is more to protect or ensure liquidity in the banking system, which indirectly obviously tends to support bond yields. So, if I draw that entire band together, we think that impending inclusions also as and when, it is not that it is going to be very near-term, but when that happens that will definitely propel yields lower.