Foreign portfolio investors’ (FPIs’) holding of Indian debt is expected to be around 4 per cent of total outstanding after the inclusion of Indian government bonds into JP Morgan’s widely tracked emerging market government bond index, and this expansion provides ample headroom, suggesting minimal volatility following the induction, said Ashima Goyal, an external member of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC).
She expects around $30 billion inflows on the back of the inclusion.
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“Indonesia allowed local currency bonds owing to the push from international institutions, saying that a lot of money wanted to come into emerging markets and local currency bonds, and you won’t have any currency risk. The share of foreign money in the (Indonesian) bond market went up to 40 per cent. India is at 4 per cent (expected),” she said, while speaking at IIM Kozhikode’s conference on macroeconomics, banking, and finance in Mumbai. “This gives ample headroom and there shouldn’t be any major volatility.”
Goyal, who is also a professor at the Indira Gandhi Institute of Development Research in Mumbai, further said that India’s headline inflation rate is expected to decline to core inflation levels shortly.
“Research suggests that in the current situation, it is core which is steadier and that affects inflation expectations and headline comes down to core. So, we should see this happen soon,” she said.
In January, the Consumer Price Index (CPI)-based retail inflation dipped to a three-month low, standing at 5.1 per cent compared to 5.69 per cent in December. Food price inflation decreased to 8.30 per cent from 9.53 per cent in December. Furthermore, core inflation, excluding food and fuel, eased to 3.6 per cent in January, down from 3.9 per cent in December 2023, marking the lowest figure since November 2019.
Goyal also discussed the perception of changes in the government’s finances. She referred to recent statements from the International Monetary Fund, indicating that the debt-to-GDP ratio was projected to rise beyond 100 per cent. While acknowledging similar trends in the US, she noted that in India, there was a decrease in deficit ratios due to higher growth, suggesting an expected reduction in these ratios.
Goyal also pointed out that India’s debt ratio was higher compared to East Asia, attributing this partly to the historical absence of counter-cyclical measures. She observed that the current government appeared to adopt a conservative approach.