India vs market peers: Are Indian government bonds still attractive?

As India opens its bond market further, investors are weighing its strengths against higher-yielding rivals such as Brazil, Mexico, and South Africa

India's government bond market is getting renewed attention from global investors after a series of policy moves aimed at making the country's debt more accessible. For international fund managers, the question is no longer whether India is investable, but whether Indian government securities, or Gsecs, offer a better risk-reward proposition than bonds in Indonesia, Mexico, Brazil, South Africa, Malaysia, or Vietnam.

 

While India does not offer the highest yields in the emerging-market universe, experts argue it compensates investors with stability, liquidity, and improving market access.

 

Yield is only part of the story

 

A comparison of major emerging-market bond markets shows that India sits somewhere in the middle of the pack. 

Country	10Y govt bond yield (%)	Inflation (%)	Approx. real rield (%)	Currency volatility vs USD	Credit Rating (S&P/Fitch)	Foreign ownership levels
India	~6.9	~3.4	~2.5	Low-Medium	BBB- / BBB-	~3%
Indonesia	~6.8	~3.08	~4.06	Medium	BBB / BBB	~14%
Mexico	~9.3	~3.9	~4.5	Medium-High	BBB- / BBB-	~17%
Brazil	~14.8	~4.3	~9.0	High	BB / BB	~10%
South Africa	~8.6	~4.0	~4.0	High	BB- / BB-	~25%
Malaysia	~3.6	~1.9	~1.6	Low	A- / BBB+	~22%
Vietnam	~4.4	~5.6	~1.0	Low-Medium	BB+ / BB+	<2%

 

 

At first glance, Mexico, Brazil, and South Africa appear more attractive because they offer significantly higher nominal and real yields. However, investors rarely make decisions based on yields alone.

 

"On a pure yield screen, India loses. The ten-year Gsec pays around 6.9 per cent, below Mexico near 9 per cent and Brazil's double digits. So why buy India at all? The answer lies in the quality of that yield, not its size," said Sitashwa Srivastava, founder and CEO of Borderless, a global retail banking suite.   

 

Stability remains India's biggest selling point

 

According to experts, India's appeal stems from a combination of moderate yields, a relatively stable macroeconomic environment, and a deep domestic bond market.

 

Srivastava said India benefits from relatively controlled inflation, positive returns after accounting for inflation, improving government finances, and a rupee that tends to be more stable than many emerging-market currencies.

 

While Brazil and South Africa offer higher yields, their currencies can be far more volatile. Sharp currency swings can quickly erode gains earned from bond coupons, making headline yields less attractive than they initially appear.

 

"A stable rupee offers predictability to investors seeking steady bond returns, but it provides less scope for the kind of currency gains sometimes available in markets such as Mexico or Brazil," Srivastava said.

 

Nikita Seth, legal associate at Jotwani Associates, echoed a similar view. According to her, Indonesia and Mexico may offer slightly better returns after adjusting for inflation, but India remains attractive because of its economic stability, strong sovereign credentials, and a bond market that is large and easy for investors to trade in.

 

"For institutional investors who prize liquidity and legal certainty, Indian government bonds remain highly attractive," she said. 

 

Reforms are reducing long-standing barriers

 

Another factor working in India's favour is the government's effort to make the market easier for foreign investors to access.

 

India made it easier for foreign investors to buy government bonds through the Fully Accessible Route (FAR) introduced in 2020, which removed investment limits on certain securities. The government has also recently scrapped taxes on interest income and gains earned by eligible foreign investors from these bonds.

 

According to Nehal Sampat, partner at Price Waterhouse & Co LLP, part of PwC India, restrictions on foreign ownership and taxation have historically been among the biggest obstacles to greater participation by global investors.

 

"The elimination of taxes on Government debt securities announced by the Government, and the changes with respect to foreign investment announced by the RBI, will help make a more compelling case for the inclusion of Indian Government debt securities in global bond indices," he added.

 

Why low foreign ownership matters

 

One of India's most distinctive features is that foreign investors still own only a small portion of the government bond market compared with several peers.

 

Srivastava estimates foreign ownership at roughly 4 per cent in India versus around 40 per cent in Indonesia and 30 per cent in Malaysia. This relatively low level of foreign ownership could work in India's favour as there is more room for overseas investors to increase their holdings as the country's presence in global bond indices grows.

 

"The most underrated factor is ownership. Since India's entry into the JPMorgan and Bloomberg indices, that low base is precisely the attraction," he said.

 

What could make investors turn cautious?

 

Rajesh Gandhi, partner at Deloitte India, said currency depreciation continues to be a concern for overseas investors. "The rupee devaluation, especially as a consequence of oil prices, is a deterrent for foreign investors since their returns from India take a hit of 3-5 per cent per annum," he said.

 

However, he added that the recent tax exemption for Gsecs could offset part of that concern by improving post-tax returns.

 

Experts caution that foreign investors could turn more cautious if:

 

• Government's finances deteriorate, raising concerns about higher borrowing and debt levels

• US bond yields become significantly more attractive, reducing the appeal of emerging-market debt, including India

• Inflation picks up again, putting pressure on interest rates and the rupee

• Global oil prices rise sharply, increasing inflationary risks and widening India's import bill

• The rupee weakens significantly against the dollar, eroding returns for overseas investors 

 

India may not be the highest-yielding bond market in the emerging world, but experts say it offers something increasingly valuable in uncertain times: stability. For global investors weighing returns against risk, that may be enough to keep Indian government bonds firmly on the radar.