Till India's debt market do us part

Indian capital markets have begun rebalancing overseas debt and equity inflows, a process that will contribute to their structural stability. Indian equities fetch fancy prices among emerging markets, but correct themselves on signs of economic stress. Investments in government bonds previously faced entry restrictions in terms of accessibility and tax treatment, which have now been addressed. Debt flows are expected to rise steadily from a low base, while equity flows are likely to remain volatile. The blended pool of foreign capital in India should, thus, become less flighty as opportunities open for diversification among asset classes within the country. This has a bearing on an economy running persistent trade deficits and a devaluing currency. Strong outflows from equity markets contribute to rupee depreciation during global crises such as energy shocks. A bigger base of foreign debt investment can serve as ballast.

India has been conservative about opening its debt market to foreign investors. The big risk in debt is a spike in global interest rates that triggers selloffs in EMs. Interest rates have remained benign for an extended period, and surges - such as the one post-Covid - were coordinated by central banks. The likelihood of hot money flows has dropped since the Asian crisis of the 1990s. The absolute level of foreign debt holding also does not constitute a risk of yield spikes that could upset GoI's borrowing plans. Neither does it threaten a disorderly rupee devaluation in the event of a pullout. The Indian equity market has acquired the ability to neutralise foreign investor exits. The debt market is, by design, meant to withstand similar volatility.

A series of international crises has exposed India's susceptibility to rapid capital movement. Remittances have shown remarkable resilience, while volatility in equity investments has been dampened by the financialisation of household savings. With guarded globalisation of its debt market, India should be able to sustain the import intensity of its growth.