Indian Bond Market Awaits Fiscal Strategy Details for Next Rally, According to Citibank

Market participants are keeping an eye on the upcoming Indian government budget, anticipating details on the nation's fiscal consolidation roadmap. Analysts believe this information is crucial for sparking the next bond market rally. Citibank's India market head noted that once the fiscal strategy is clearer, the 10-year benchmark yield, which currently sits at 6.99%, has the potential to fall to between 6.80% and 6.85%. However, future market trends will also be influenced by the Reserve Bank of India (RBI) and the Federal Reserve's interest rate decisions.

Current Fiscal Measures and Global Perception

The newly established government has expressed no intention of raising the previously set fiscal deficit target. The aim is to maintain the 5.1% target, which seems achievable given the RBI's large surplus transfer to the government. This has provided a considerable buffer, affording the government some flexibility in managing its fiscal activities.

International Market Dynamics and Indian Bonds

The Federal Reserve recently opted to keep policy rates the same, adjusting its future rate cut expectations to just one cut in 2024—reduced from the earlier prediction of three cuts. Despite unexpected results in India's national elections, Citibank forecasts a sustained positive sentiment among global investors toward Indian investments, awaiting the full budget disclosure in July.

Indian bonds are becoming increasingly attractive to foreign investors, especially with their inclusion in the prominent JPMorgan index. This event has already resulted in approximately $10 billion in foreign inflows, and Citibank anticipates an additional $20 billion within the fiscal year. Although these inflows bolster India's balance of payments surplus, now expected to exceed $50 billion, their effect on the Indian rupee's value isn't as straightforward due to potential RBI interventions to shore up foreign exchange reserves.

Rupee Stability Amidst Foreign Exchange Accumulation

The RBI's proactive reserve accumulation, now at an all-time high of $651.51 billion, equips it with substantial means to mitigate market volatility. This strategy secures the rupee against significant depreciation risks, further reinforcing investor confidence in the Indian market.

In conclusion, India remains a point of focus for many international investors, drawn by its robust economic fundamentals and proactive fiscal management.

India, Bond, Market