Samvat 2080: Start of a new year signals better prospects for bonds, rupee

Foreign inflows expected after index inclusion; rate cuts on the horizon

Participants in the bond and foreign exchange (forex) markets are optimistic about Samvat 2080, anticipating significant foreign inflows due to the inclusion of government bonds in JPMorgan’s emerging market (EM) bond index and potential interest rate reductions by central banks.

JPMorgan announced India’s inclusion in its widely followed EM bond index on September 22, specifically in its flagship JPMorgan GBI (Government Bond Index)-EM. The inclusion will be gradual over 10 months, with a 1 per cent weight added each month until March 31, 2025.

Approximately $30 billion in inflows are expected into the government bond market following this inclusion. Market participants foresee the possibility of other indices, such as Bloomberg, including India following JPMorgan’s decision.

“Looking from one Samvat to another, the outlook appears positive as the coming year is expected to be favourable, with overall optimism extending throughout the entire financial year, making it even better,” said Vikas Goel, managing director and chief executive officer at PNB Gilts.

“January will witness the return of foreign investors, with active participation continuing into February. These investors are likely to engage in front-running, anticipating market inclusion. The second half of the financial year holds the possibility of Bloomberg index inclusion, which could provide additional impetus to the positive pattern observed,” Goel added.

Taking a broader perspective, market participants anticipate that the current quarter may mark the bottom of the economic cycle.

From the next quarter onwards, there is an optimistic forecast for an uptick in economic activity. Signs of recovery are already evident, and analysts predict that this positive momentum will only accelerate in the subsequent months.

Another reason for this optimistic outlook is the expected actions of central banks. The Reserve Bank of India (RBI) is expected to initiate rate cuts, following a three-month lag after the projected May cut from the US Federal Reserve (Fed).

“The RBI is poised to implement rate cuts, with a three-month lag following the anticipated May cut from the Fed. This synchronised approach reinforces our belief that the upcoming year holds promise,” said the Treasury head at a private bank.

While uncertainties exist, the overall trajectory suggests a promising period ahead for investors, according to market participants.

The yield on the benchmark 10-year government bond fell by 21 basis points, whereas the rupee depreciated by 0.79 per cent in the Samvat ending November 12.

The local currency hit a new low of 83.48 (intraday) against the US dollar on the last day of the Samvat 2079. Some market participants said that the sharp volatility was a result of a sudden system outage, as the RBI has been active in the forex market to curb volatility.

The rupee remained relatively stable throughout the year, despite hitting new lows.

“USD/INR has been one of the least volatile since 2002,” said Anindya Banerjee, vice-president of currency derivatives and interest rate derivatives at Kotak Securities.

In the current financial year (2023-24), the rupee has depreciated by 1.4 per cent, whereas it has fallen by 0.7 per cent so far in the current calendar year. However, it had appreciated by 0.16 per cent in the first six months of this current calendar year on the back of robust foreign inflows.