India looks set to weather global bond rout with record reserves

India’s record foreign-exchange reserves and a rare current-account surplus look set to cushion the nation’s currency and bonds from a global surge in interest rates.

While the Reserve Bank of India does have its hands full managing the government’s large debt issuance, strategists see the country in a much stronger financial position now than it was during previous bouts of turmoil in world markets. They cite the rupee, which has eked out a gain this year, defying the slump seen in most emerging-market currencies, and relative stability of India’s bonds.

With reserves closing in on $600 billion and a current-account surplus forecast to exceed 1 per cent of gross domestic product, talk of India as one of five fragile emerging markets has mostly faded away. When the description was coined during the taper tantrum in 2013, inflation in India was running at around 10 per cent.

Data due March 12 is projected to show consumer prices rising at less than half that level, and well below the 6.6 per cent average of last year. Meanwhile, benchmark 10-year bond yields have largely been capped since last year by the central bank and the nation’s stocks continue to see foreign inflows.

“India’s markets are likely to be relatively immune to higher U.S. yields in the weeks ahead,” said Mitul Kotecha, chief EM Asia and Europe strategist at TD Securities in Singapore. “India has been a key beneficiary of equity inflows into Asia and we do not see outflows persisting.”

Ahead of the CPI figures, here is a series of charts highlighting points of strength in India that have been cited by analysts.

Stock inflows

Indian stocks have attracted about $6 billion of foreign inflows this year, the highest in emerging Asia after China, and well above those of the country’s erstwhile ‘Fragile Five’ peers. The prospect of strong economic growth has been underpinned by an early start to India’s coronavirus inoculation campaign, aided by domestically produced vaccines.

FX reserves

The RBI has added $127 billion to its foreign-exchange kitty since the beginning of January last year, the biggest increase among major Asian economies. At the current rate of accumulation, India is on course to pass Russia and take fourth place in global rankings for reserves, behind China, Japan and Switzerland.

This large well of reserves should give authorities fire power to deal with any potential capital outflows driven by external shocks, according to Kaushik Das, Chief India Economist at Deutsche Bank in Mumbai.

Current account

India is expected to post a current-account surplus of 1.1 per cent of GDP in the current fiscal year, along with a balance-of-payments surplus of $96 billion, according to Emkay Global Financial Serviced.

While the current account may swing back to a small deficit next fiscal year, healthy capital flows may keep the balance of payments positive to the tune of $45-50 billion, helping to support the rupee, according to Madhavi Arora, lead economist at Emkay.

Bond returns

India’s sovereign bonds offer more stable returns than many others in emerging markets, as measured against annualised 60-day volatility in benchmark 10-year securities. The RBI has made over ₹3-lakh crore ($41 billion) of bond purchases this fiscal year and plans to buy at least that amount next year, according to RBI Governor Shaktikanta Das, which should help to curb gains in yields.

Economic growth

India’s economy is projected by the International Monetary Fund to grow 11.5 per cent in 2021, a pace that is likely to be the fastest of any major economy, which also augurs well for inflows and the rupee.