NEW DELHI: India’s bond yield premium over the United States has narrowed to its smallest in two decades, likely risking fund outflows from local debt.
The spread between the benchmark 10-year India debt and the United States has shrunk to about 173 basis points, a level last seen in 2004, according to data compiled by Bloomberg.
Indian bond yields have been declining, driven by the country’s strong fiscal position, easing inflation, and expectations of lower interest rates, according to DBS Bank Ltd.
Furthermore, this trend diverges from the United States, where unfunded tax cuts have recently sparked fiscal concerns.
The contrast has even led billionaire banker Uday Kotak to wonder whether Indian yields could eventually dip below those in the United States.
“This compression is likely to hold given a favourable change in India’s rates backdrop at this juncture, while investors’ worries over the United States’ fiscal strains are still to be addressed,” senior economist Radhika Rao wrote in a note.
Foreign funds have poured a net US$2.3bil into rupee debt this year, though the current quarter has seen about US$4bil of outflows.
Equity flows have also turned volatile, with global funds pulling a net US$1.2bil last Tuesday, the biggest single-day withdrawal since February.
Still, India’s shrinking yield gap and improving economic fundamentals could drive local stocks to outperform United States and global markets, according to Anand Rathi Financial Services Ltd. — Bloomberg
