With India becoming the most populous country in the world and projected to become the world’s second largest economy after China, investors’ attention is shifting to this Asian nation. In this context, sovereign bonds issued by India are capturing the interest of many, with still high yields and promising economic growth prospects.
However, before deciding whether to invest in these bonds, it is essential to carefully assess the opportunities and risks involved.
India bonds: high yields and medium sovereign risk
Investors looking for attractive yields might find Indian bonds attractive, as yields still remain high. But it is crucial to understand the context behind these high yields.
Currently, the ten-year sovereign offers a yield of around 7.08%, 3.25% higher than the T-bond of the same duration. Although yields are down from previous highs, they are still attractive.
Sovereign risk is considered medium, with rating agencies giving BBB- (S&P and Fitch) and Baa3 (Moody’s) ratings to the country’s debt.
Public debt accounts for 85% of India’s GDP, a significant figure for an emerging economy. But the prudent fiscal policy led by PM Narendra Modi has helped sustain economic growth and reduce the debt/GDP ratio in the medium to long term.
Towards inclusion in international indices?
An interesting opportunity in the medium term for investors is the possible inclusion of India’s bonds in international indices, such as the JP Morgan Global Bond Index Emerging Markets. Currently, despite being one of the largest sovereign markets in the world, India has not yet been included in such indices, but this could change in 2024.
Inclusion in these indices would bring more liquidity, stronger demand and potentially lower yields for Indian bonds.
However, there are some hurdles to overcome, such as allowing foreign investors to divest easily. Recent actions by the Indian government, such as the relaxation of restrictions for foreign investors, indicate a greater openness towards inclusion in international markets.
This could trigger a virtuous cycle of appreciation of India’s bonds and reduction of the fiscal deficit.
Investing in Indian bonds with attention to risk
While there are attractive prospects for investing in Indian Bonds, it is crucial to carefully consider the associated risks.
The Indian rupee, for instance, has shown a tendency to depreciate against the dollar in recent years, a factor to be taken into account for investors wishing to protect their capital.
Moreover, India’s political landscape is subject to uncertainty, with a major election imminent for the third term of Prime Minister Narendra Modi. Political stability is critical for the Indian economy. And any changes could affect markets and bond yields.
In conclusion, investing in India’s bonds can be an attractive opportunity to diversify the portfolio and increase average returns, especially considering the growing bond market and the potential inclusion in international indices. However, on the other hand, investors should act with caution, carefully assessing the associated risks. Such as the average sovereign risk and the volatility of the Indian rupee.
Before making a decision, it is advisable to consult with an experienced financial advisor to assess how Indian bonds fit into one’s investment strategies and financial objectives.