Beyond the bond market’s message

Source: The post is based on the article “Beyond the bond market’s message” published in Business Standard on 9^th October 2023.

Syllabus: GS 3 – Indian Economy – Growth & Development

Relevance: Economic challenges for India arising from shifts in the US economy.

News: The article discusses ongoing developments in the US economy and their potential implications for India.

What are some of the changes happening in the US economy?

Bond Market: The US bond market has crashed since March 2020, with 10-year and 30-year Treasury bonds losing 46% and 53%, respectively. It resembles the worst stock-market losses in history.

Interest Rates: Initially, there were expectations that the US Federal Reserve would reduce interest rates due to moderated inflation.

However, now the Fed is not inclined to cut rates as long as the US economy remains strong and there might even be a rate hike.

Note: Bond prices and bond yields are inversely correlated, i.e., when bond prices crash, yields go up.

What impact do these economic changes in the US have on India?

When bond yields rise, equity prices fall. This makes equities become less attractive and their prices drop.

As a result, foreign investors have been selling Indian equities in large amounts recently due to increasing US bond yields. The surge in oil prices has further impacted equity markets.

However, unlike the past, where a weak US economy would negatively affect developing markets like India, the situation has changed now. The Indian bond market has been stable due to favorable economic conditions and good fiscal management. 

More domestic savings are entering the Indian market through mutual funds and provident funds, countering the selling of bonds by foreign investors.

For example, in August and September, foreign investors sold a net of ~47,300 crore in Indian bonds, but domestic institutional investors bought a net of ~45,300 crore, almost balancing the foreign selling.

What are other concerns for India?

First, the global economy is slowing down, which is a major concern for India. China, Europe, and the US are facing economic challenges. India, which relies heavily on exports, may have its economy affected due to the reduced global demand for its goods. This could also weaken the rupee.

Second, rising oil prices are another major concern for India. Russia and OPEC have cut production, which is driving up prices. Oil prices rose sharply in July-September, and they could rise again due to the conflict between Israel and Palestine.

What can be the course of action?

India’s fiscal condition and ability to fund 10 trillion rupees allocated for infrastructure spending in the 2023-24 Budget will determine the course of its economy and markets.

However, higher borrowing costs, rupee pressure, and lower tax collection could also affect these projects. Hence, it’s crucial to closely monitor these factors as they could impact India’s economic growth.