Indian bonds have not participated in the global bond sell-off of the last three months
With inflation expectations remaining elevated globally, investors have begun to question whether the outperformance of Indian bonds can last
While bond investors the world over have had a torrid six months, those who invested in Indian bonds are laughing all the way to the bank. As rates have normalised the world over, they’ve had to put up with none of the mark-to-market losses that bond portfolios the world over have suffered. In fact, the yield on the Indian 10-year has barely moved from about 7 percent to 7.38 percent since the Union Budget on February 1.
Contrast this with the US 10-year that has moved from 1.7 percent to 3.57 percent with brief detour to 4 percent. Or the German bund (10-year) that rose from 0.03 percent to 1.83 percent or the Japanese 10-year that moved into positive territory to 0.22 percent and the outperformance becomes stark.
“Expectations at the beginning of the year was that Indian bonds will also underperform. But the Reserve Bank of India (RBI) has moved in sync with global rise in rates,” says Upasna Bharadwaj, chief economist at Kotak Mahindra Bank.
With inflation expectations remaining elevated globally, investors have begun to question whether the outperformance of Indian bonds can last. While it is hard to predict which way the global macroeconomic environment will shape up, there remains a strong chance that Indian bonds will hold their own.
First, let’s consider why we outperformed. In most western economies, the rise in rates has come about as a result of the normalisation of monetary policies. Savers have moved from no return to a positive rate of return. In India, inflation expectations have always been at between 4-7 percent, so our rates have always been in positive territory during the pandemic period. In the last monetary policy meet on September 30, the RBI maintained its inflation forecast at 6.7 percent. At above 7 percent, Indian real rates are already in positive territory.