Tax Relief May Not Boost Foreign Investment in Indian Bonds, Warns SBI Funds

Foreign investment flows into Indian government bonds are expected to remain subdued in the near term, primarily due to a combination of global yield dynamics, domestic interest rate trends, and currency expectations. Despite the recent removal of taxes on overseas purchases of sovereign bonds, analysts from SBI Funds Management express skepticism that these changes will significantly alter the investment landscape. Observers should note the deferred inclusion of India into global bond indices, which is likely to further limit foreign portfolio investment (FPI) in Indian bonds. The report emphasizes that, with index inclusion postponed, there is little optimism for increased foreign inflows in the coming months.

The Reserve Bank of India (RBI) is projected to maintain a steady interest rate stance for an extended period, which could exacerbate the challenges faced by foreign investors. According to SBI Funds, the prevailing global yields offer minimal incentive for local interest rates to rise. The report indicates that tax relief measures, while beneficial, might not be sufficient to attract robust foreign demand for sovereign bonds, as the relative yield differentials and the prevailing economic policy conditions are not particularly compelling. Flows, if any, are anticipated to be largely tactical and influenced by currency expectations.

Furthermore, the RBI’s August monetary policy guidance conveys a cautious stance, indicating a likelihood of holding rates steady as it navigates through an inflationary environment. Core inflation, projected around the central bank’s target of 4%, suggests a degree of tolerance towards elevated headline inflation rates. This prolonged pause in monetary policy normalization could further alienate potential foreign investors who are already grappling with the challenge of unattractive returns compared to global counterparts. The report highlights the notion that ongoing structural issues, including weaker fiscal conditions and persistent inflation in developed economies, are likely to sustain higher global bond yields for the foreseeable future, further limiting the attractiveness of Indian sovereign bonds.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)