Let's gilt trip those foreign investors

Indian government bonds are becoming a highly attractive buy for foreign investors, Goldman Sachs has told clients. This comes on the heels of coordinated measures by GoI and RBI - including favourable tax changes and easier market access - that have already triggered a surge in overseas buying of long-dated gilts. While these policy moves were initially made to counter capital fleeing Indian stocks after the Hormuz shutdown, Goldman Sachs analysts emphasise that the conflict will neither derail India's fiscal consolidation path nor force RBI into premature interest rate hikes. Both factors encourage foreign investment in Indian treasury bonds.

India's bond market is becoming stronger structurally with consistent buying by domestic institutional investors. Foreign ownership of Indian gilts is low, which makes the market less vulnerable to global bond sell-offs. Yields on Indian gilts are relatively higher than those in other emerging markets. Withholding and capital gains taxes have been scrapped for foreign investors, improving returns. India's gilt market is now reaching a size that foreign investors cannot ignore. Yet, their exposure is minuscule in comparison to mature bond markets. This opens an avenue for diversification for global institutions.

Recent economic performance has helped. The economy has weathered successive crises without losing momentum. It had the quickest recovery from Covid disruptions and has successfully negotiated back-to-back energy shocks despite its import dependence. Domestic consumption provides a cushion in an unstable global economic landscape. Financialisation of household savings has made its capital markets, both equity and debt, more resilient to international financial flows. A manufacturing push and an energy transition should keep the trade balance within manageable limits. And the debt GoI is raising is going into capex that sustains India's class-leading growth. It's time for global bondholders to pay serious attention to the Indian debt market.