Global Investors Flock to India: Rupee Stability and Bond Market Opportunities in 2025
Did you know that the Indian Rupee has remained remarkably stable amidst global economic turbulence? Even though it has dipped due to a general decline amongst most Asian currencies, the Indian Rupee is not expected to fluctuate to a significant degree as we look ahead to 2025, due to the strong growth of the Indian economy and timely interventions by the Reserve Bank of India (RBI).
At the Fixed Income & FX Leaders’ Summit APAC 2024, experts discussed India’s inclusion in the Global EM Bond Index (GBI-EM) and its impact on market liquidity and price discovery. As the Rupee strengthens and its volatility decreases, investors are looking to diversify portfolios by purchasing IGBs, driving higher yields while mitigating risks. In turn, this helps to further propel India’s growing economy.
The Emergence of Derivatives in IGBs: Opportunities for Offshore Investors
A key highlight from the summit was the growing interest in derivatives related to IGBs. One panelist highlighted how the interest rate swaps market is heavily used by foreign investors for hedging and active risk management. While the bond futures market is still in its infancy, experts predict it will play a larger role in the future.
Currently, IGB futures are limited to onshore markets, but there’s potential for expansion. "Theoretically, trading IGB futures in India is possible through a local ‘Trading Member,’ who can enter orders on behalf of foreign institutional investors," one speaker explained. Though offshore derivatives for IGBs don’t exist yet, there are no regulations preventing their development, which makes the future of IGB derivatives offshore promising.
India’s Steady Growth: Enhancing the Appeal of IGBs
The outlook for IGBs is closely linked to India’s steady economic growth. One speaker pointed out that, despite fluctuations in U.S. Treasuries (UST), the spread between USTs and IGBs has remained attractive, ranging between 250 and 320 basis points in 2024. “While U.S. Treasuries have been unpredictable due to Fed policy uncertainty, IGBs are seen as more stable and predictable,” the speaker noted.
India’s strong fiscal and revenue performance continues to attract foreign investors. With the central bank shifting to a neutral stance and domestic growth pressures likely leading to easing, IGBs are poised to remain attractive. The recent inclusion of India in the JPMorgan GBI-EM index, which saw over $20 billion inflow through September, is set to continue through March 2025 and its potential inclusion to EM indices and Bloomberg Global Aggregate index. As a result, IGBs have become a key component of emerging market local currency portfolios.
The Rupee: An Important Diversifier in Global Portfolios
Over the last decade, the Indian Rupee has experienced an annualized depreciation of approximately 3% against the dollar, driven primarily by domestic events. However, during periods of global market turbulence, such as the 2018 and 2022 depreciation phases, the Rupee has proven to be more resilient than many other emerging market currencies.
"In 2022, despite a 12% depreciation of the Rupee, India’s local currency bond market saw a gross return of -7.6%," said one speaker. "This may seem like a significant dip, but it is noteworthy considering the broader global context, where U.S. Treasuries, global aggregate indices, and emerging market bonds all suffered larger losses."
This performance highlights the Rupee’s stability amidst unpredictable global events. For investors looking to hedge against uncertainty, the Rupee has offered lower volatility and better asset allocation opportunities. For instance, from September to November 2024, the Singapore dollar depreciated by over 4% against the dollar, while the Rupee only depreciated by 0.8%.