Most experts believe that the inclusion will help in making the domestic bond market resilient and bring down yields, despite the negativity around global bond yields.
“For the medium term, once this entire noise around Fed hikes and global yields stabilises, we believe peak market rates are behind us and market yields could gradually soften,” said Axis Mutual Fund, whose medium-term target for the benchmark 10-year bond yield is at 6.75%.
On Friday, the yield on the 10-year treasury note ended at 7.19%, higher than the previous day level, but had fallen to 7.09% during the day following the news of the inclusion.
Besides the global bond inclusion, analysts pointed out several other factors that are likely to be in favour of the bond market in the second half of the current fiscal year.
India’s economy is doing well when compared to other emerging as well as developed economies. Further, inflation is also likely to trend lower in the coming months, which will keep conditions conducive for the Reserve Bank of India to stay put on rates.
Also, the demand-supply dynamics are turning favourable for the bond market in the second half of FY24 due to lower net supply, said Nuvama Institutional Equities.“We are bullish on the Indian Government Bonds over the medium term at current levels. We prefer 10- to 14-year Fully Accessible Route (FAR) eligible government bonds for their superior risk-reward trade-off,” the brokerage said.
The inclusion of government bonds is expected to lead to inflows of billions of dollars, with analysts and economists pegging it at close to $25-30 billion into the domestic market.
So far in 2023, FPIs have net invested only around $3 billion in the Indian debt market.
The increased foreign investments will help in reducing domestic borrowing costs and ease bond yield on account of a change in the base rate, says Trivesh D, COO, Tradejini.
“With the inclusion, we hope that the credit rating agencies also align their rating methodologies to give weightage to the investors’ view,” he added.
With Russia being excluded and China under global scrutiny, the options for global debt investors have shrunk over the years and, therefore, most experts believe that India stands to gain significantly from this inclusion.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)