The year 2024 will be the comeback year for the Indian debt market as growth-inflation dynamics favour debt markets globally. Long-duration debt funds are aptly placed to deliver double-digit returns, according to brokerage ICICI Direct.
Moreover, the rate-hiking cycle has peaked and the rate-cutting cycle is about to begin. Inflation is cooling off along with slowing global growth. High interest rates, declining growth and heightened geo-political tensions have increased the risk of financial or economic shocks, while domestic demand-supply dynamics in the bond market is looking more favourable with robust tax collections, the government’s fiscal consolidation plan and India’s inclusion in the global bond index.
Monetary Policy – Heading for Reversal
US Rate setting panel (FOMC) is indicating 75bps rate cut in 2024
Source – Bloomberg, Data as of December 13, 2023
Yellow dots represent each FOMC members’ projection of future Fed Funds Rate; the green line shows the median estimate for the same.
Government Bond Index inclusion: A game changer
India will be included in the JP Morgan GBI EM Index starting June 2024 with an eventual 10% index weight to be reached by March 2025.
“Index inclusion can open a source of consistent demand for Indian bonds from investors who track the index, particularly from the exchange-traded funds or ETFs. Even active investors will be more comfortable investing in India when it becomes part of the index,” said Pankaj Pathak Fund Manager, Fixed Income, Quantum AMC.
Apart from JP Morgans GBI-EM-GD index, Bloomberg Global Aggregate Index(Global Agg) is also likely to include Indian bonds in its index. It has an estimated AUM of $2.5 trillion and with 0.6%-0.8% weight, additional potential inflows could be $15-20 billion.
“Such inflows coinciding with global rate cut cycle is likely to push bond yields lower resulting into lower cost of funds for Indian corporates,” noted the brokerage.
Apart from the direct impact of additional demand, there could be spill-over benefits as well, as explained by Pathak:
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The new demand source for government bonds might also help in deepening the corporate bond market in India. -
Potential foreign inflows into Indian debt will expand the source of foreign capital which in turn will strengthen India’s balance of payment situation and deepen the market for the Indian Rupee. -
Foreign holding of bonds would enforce much stricter discipline on the fiscal and monetary policy. -
Increased participation by foreign investors, would enhance the credibility of the Indian bond market and will make it easier for the government and the corporate sector to raise debt capital from global investors.
FPI Global bond index inclusion-related buying is already visible
So far in 2023, foreigner investors (FPI) have been consistent buyers in the bond market with a net purchase of Rs 568 billion ($ 6.83 billion) of government bonds (data upto December 19, 2023). “We expect the pace of foreign buying in Indian bonds to increase in 2024 with the global interest rate changing course,” said Pathak.
India: Expected Rate cut: 75bps…Yield could move down 100bps
In the 2015 rate cut cycle, the 10-year G-Sec yield declined by around 115bps between April 2014 till January 2015. The total rate cut during the cycle was 200bps. “Yields started moving down in 2014, well before the start of the rate cut cycle which started in 2015. The return during the 1-year period from April 2014 to March 2015 (pre-rate cut period) was around 15 per cent,” noted the ICICI Direct report.
In 2019 rate-cut cycle , the 10-year G-Sec yield declined by around 190bps from September 2018 till July 2019. The total rate cut during that period was 135bps. The return during the 1-year period from September 2018 to September 2019 was around 16 per cent.
The year 2024 could offer a 12%-14% return in duration funds
What should investors do?
“With high starting yield and expectation of fall in bond yields, we believe that long-term government bonds offer investors a rewarding opportunity. Dynamic Bond Funds are probably best placed to capture this opportunity with the flexibility to change if things don’t pan out as expected. However, investors need to have a longer holding period of at least 2-3 years to ride through the intermittent volatility,” said Pathak.
Investors with shorter investment horizons and low-risk appetites should stick with liquid funds.
For those looking for long-term double digit returns, ICICI Direct recommends HDFC Long Duration Debt Fund, Nippon India Nivesh Lakshya Fund and SBI Long Duration Fund.
First Published: Jan 03 2024 | 12:02 PM IST