India Chart Book

India Chart Book

Global index inclusion would marginally boost bonds

Speculation is building that India will be included in major global bond indices over the next year or so. If that happens, it would highlight the local bond market’s growing maturity and be cast as a coup by the government, for which bond index inclusion has long been a stated policy aim. With vast amounts of assets tracking global indices, this would leave scope for a rise in portfolio inflows. To be clear, with India’s weighting in any global index likely to be small and increased only gradually, the impact is more likely to be marginal than transformational. Nevertheless, bond index inclusion would still bolster our view that, supported by a commitment from the RBI to keep policy very accommodative, Indian bond yields should only rise very slightly over the next 18 months even in an environment of higher US Treasury yields.   Drop-In: Evergrande – What are the risks to China and the world? Chief Asia Economist Mark Williams and Senior China Economist Julian Evans-Pritchard will be joined by Senior Markets Economist Oliver Jones to take your questions about the Evergrande situation. They’ll be covering the implications of collapse for China’s financial system and growth outlook, and assessing the global markets fallout. Register here for the 0900 BST/1600 HKT session on Thursday, 23rd September.

22 September 2021

India Chart Book

Capital outflows would be no major macro concern

Foreign portfolio outflows from Indian financial markets have been easing this month, bucking the broader EM trend. This may have been driven in part by the improvement in the virus situation. Looking ahead, the growing likelihood of the US Fed beginning to taper its asset purchases this year and an accompanying rise in US Treasury yields could reignite foreign outflows from Indian assets (as well as other EMs). But if they do pick up, India’s economy is much better placed to cope with a sustained bout of capital outflows than it has been in the past, most notably during the “Taper Tantrum” of 2013. After all, the current account is in surplus, FX reserves are close to all-time highs and the rupee does not look overvalued. One consequence of this is that the RBI will not rush to tighten monetary policy.

25 August 2021

India Chart Book

Inflation has now peaked

Amid the ongoing debate over inflation in a post-pandemic world, one thing that does appear clear is that near-term price pressures in India have peaked. Consumer price inflation held steady in June at 6.3% y/y, while wholesale price inflation dropped for the first time since December. Daily data show that, despite concerns in some states over lower-than-expected monsoon rains, food price inflation has eased further so far in July. And with last year’s rebound in global oil prices now entering the annual comparison, vehicle fuel inflation – which unusually is included in the RBI’s core measure of inflation – is likely to have dropped too. If we are right in thinking that inflation has peaked, the RBI is unlikely to withdraw policy support for a long while yet as it remains firmly focussed on supporting the economic recovery.

21 July 2021
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India Chart Book

Borrowing costs will remain in check

India’s 10-year government bond yields have remained stable at around 6% over the past month, taking the unexpectedly large jump in inflation in May and a more hawkish turn by the US Fed in their stride. That reinforces our long-held view that borrowing costs will remain low by historic standards, primarily as a result of the RBI’s policy measures. Indeed, the central bank has made clear that its purchases of government bonds on the secondary market have become a key part of its toolkit, and it duly ramped up its bond-buying commitments by INR1.6trn (0.8% of GDP) this month. Further asset purchases will follow. The RBI has also reinforced its pledge to keep policy rates very low to support the economic recovery. To be clear, we continue to think long-term yields will rise amid a renewed jump in US Treasury yields. But the rise in Indian 10-year yields that we expect – to 6.25% by the end of the year – is likely to be much smaller than in many other EMs and the US itself.

India Chart Book

Over the worst?

New virus cases in India remain extremely high, but some solace can be taken from the fact that they have dropped rapidly over the past couple of weeks back to their level in mid-April. The share of tests returning positive has fallen too. Encouragingly, the drop in cases has become more pronounced across major states, including Uttar Pradesh and Karnataka. That all said, it’s too early to sound the all-clear. Even with the fall in cases, there are widespread reports of healthcare remaining under immense pressure, suggesting that restrictions will remain in place for a considerable time yet. Further ahead, the slowdown in the vaccine rollout means that the threat of further outbreaks will remain a dark cloud over the economic outlook.

India Chart Book

Virus restrictions start to bite

Our in-house mobility tracker suggests that the surge in virus infections in India is now weighing on activity. This is likely to become more pronounced as the outbreak has become more widespread, causing several state assemblies to tighten containment measures in the past few days. Delhi this week imposed restrictions on non-essential services, while a night curfew has been introduced in Tamil Nadu. Clearly, the economic outlook is clouded with uncertainty. It seems highly likely now that GDP will contract in q/q terms in Q2, though a y/y surge in growth is still nailed on given that restrictions are nowhere near as stringent as they were a year ago. A clearer consequence of the new virus outbreak and tightening of restrictions is that the RBI will be in even less of a hurry to withdraw policy support. Markets are too hawkish in pricing in 70bp of rate hikes over the next 12 months.

India Chart Book

Waning portfolio flows not a major macro concern

Foreign investor appetite for Indian assets has faded in recent weeks. Inflows into the equity market have waned, while foreigners have turned into net sellers of Indian debt. This chimes with movements in portfolio flows in other major EMs, suggesting that global factors have been at play. In particular, the rise in US Treasury yields and concerns about a re-run of the 2013 “Taper Tantrum” has played on investors’ minds. However, outflows have been much smaller than they were in 2013. And even if they do pick up, India’s economy is much better placed to cope with a sustained bout of capital outflows than it was in 2013. After all, the current account is in surplus, FX reserves are at all-time highs and the rupee does not look overvalued. One consequence of this is that the RBI will not be in an immediate rush to tighten monetary policy.

18 March 2021

India Chart Book

Activity returning to pre-virus levels

Indian GDP data due to be released on Friday are likely to show only a small contraction in annual growth in Q4 2020, and high-frequency indicators point to a relatively strong start to 2021. Indeed, our in-house mobility tracker suggests that activity has returned to pre-pandemic levels. The outlook has improved too as fiscal policy has been loosened significantly. That all being said, there are still reasons for caution. While new COVID-19 cases remain low, the recent flare up in Maharashtra highlights the risk of targeted lockdowns, at least in the near term. Meanwhile, the ailing banking sector looks set to take a further hit this year as more loans turn sour, which we think will prevent the economy from returning to its pre-virus trend any time soon. According to RBI Governor Shaktikanta Das, this is an important barometer in determining the health of the economy. As such, we think markets are too hasty in pricing in rate hikes within the next 12-18 months and think rates will remain on hold for the foreseeable future.

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