India’s government bonds looking attractive

The Bombay Stock Exchange in Mumbai, India. Photo Credit: Niyantha, Flickr

With a booming GDP, an improving debt rating and a central bank that is mindful not to choke off growth, Government of India bonds, or GOI’s, may be an excellent place to stow some spare cash.

The interest rate on a 10-year Indian bond is hovering around 7.9 percent, well above the benchmark 10-year U.S. Treasury note, which yields around 2.58 percent.

Economists expect India’s central bank, the Reserve Bank of India, to continue inching rates upward following last month’s rate hike aimed at reigning in inflation. The inflation rate has climbed substantially to almost 13 percent this year from below 4 percent last year. But fears of inflation may be overblown.

 “I’m not too worried about inflation at this point,” said Arvind Panagariya, a professor of economics at Columbia University. “People have forgotten that inflation has traditionally been from 8 to 10 percent. My personal fear is that if they begin to tighten policy too much it could choke off growth.”

Indian GDP has grown between 5 percent and 9 percent in the past two years, and analysts surveyed by Bloomberg expect growth from 8 percent to 9 percent over the next four quarters.

Patrick Bennett, a strategist at Standard Bank Group, told the Economic Times last week that the Reserve Bank of India’s monetary policy is being well-thought-out and well-executed, and Panagariya agrees. Careful execution of monetary policy lowers the chance that the RBI will tighten too much.

This isn’t to say Indian bonds are a risk-free investment opportunity. India has one of the highest debt-to-GDP ratios in the developing world, hovering between 80 percent and 90 percent.

But the country’s debt ratio has not seemed to negatively affect its credit. Last week, Moody’s Investors Service upgraded India’s local currency credit rating to the highest non-investment category, Ba1, the country’s first upgrade since 1998.

India’s credit profile will get stronger as the economy grows and the government liberalizes markets even further, Panagariya said in an interview.

Bennett told The Economic Times that he is confident there won’t be a global double-dip recession that would negatively affect Asian markets, as some economists have feared recently. Instead, he believes the Indian economy will continue to grow slowly and steadily. More modest growth rates could eventually decrease the need for stringent monetary policy.

As a result, yields on Government of India bonds may be near a peak, and therefore attractive for investors prepared to hold the bonds to maturity. 

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