By removing key investment restrictions on government securities and expanding market access, the central bank has paved the way for stronger foreign participation at a time when India is also seeking greater representation in global bond indices.
In a conversation with Kshitij Anand of ETMarkets, Dhaval Dalal, President and CIO – Fixed Income at Edelweiss Mutual Fund, said the combination of regulatory easing and potential inclusion in broadly tracked global bond indices could lead to additional debt inflows of $20-25 billion over the next 24 months.
While global macro conditions and currency expectations will continue to influence investor behavior, Dalal believes the reforms strengthen India’s appeal as a destination for long-term fixed income capital.
He also shared his views on the RBI’s decision to keep rates unchanged, the outlook for the interest rate cycle, the impact of elevated crude oil prices and government bond yields and what the latest policy moves could mean for the rupee. Edited quotes –
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Q) RBI chose to keep repo rate unchanged at 5.25% despite rising global uncertainties. What factors do you think led to the decision to put the MPC’s decision on hold and do you think it was justified?
A) While a section of the bond market expected a 25 bp hike amid INR depreciation and rising inflation risks, the RBI chose to reinforce that its rate policy is targeted at inflation – not FX management. Comfort from April CPI below 4% and core inflation at ~3% likely supports a break. That said, a token hike could strengthen its anti-inflation credentials.
Q) The central bank has maintained its neutral stance despite rising inflationary risks. Does this indicate that the rate-cut cycle has effectively ended?
A) India’s rate-cut cycle seems to be over, the next move is likely to be upwards. Sequencing—by changes in prior attitudes or by actual increases—remains uncertain. Markets are likely to focus more on rate action than policy stance.
Q) Policy statements often highlight elevated energy prices as a key risk. At what crude oil prices does India’s macroeconomic outlook become meaningfully sensitive?
A) Sustained crude oil prices above $120/bbl will weigh on India’s macro outlook. With crude oil imports at ~$175 billion (averaging $65–70/bbl) in FY26, such levels could add $50 billion in additional burden over six months, with second-order broader economic implications.
Q) RBI has removed the short-term investment limit, security-wise limit and concentration limit for FPIs investing in government securities under the general route. How important is this reform for attracting foreign capital to the Indian debt market?
A) Removal of tax frictions and investment limits is an important step towards attracting FPI inflows into Indian government bonds. Coupled with expansion under a fully accessible route, this also strengthens the case for inclusion in the broadly tracked Bloomberg Barclays global bond indices, which could drive medium-term passive flows.
Q) What impact could this move have on government bond yields, especially at the long end of the curve?
A) These steps can be positive for the IGB curve, with yield less bias. We may see mild steepening in the long end due to market pricing in rising FPI flows in the short end.
Q) Do you expect foreign investors to increase Indian debt allocations immediately, or will global macro conditions remain the deciding factor?
A) FPIs may remain cautious in the near term, given tougher global expectations and a relatively narrow Indo-US yield spread. However, currency expectations will be key—any conviction around potential INR appreciation could boost allocations.
Q) Can increased FPI participation in government securities provide structural support to rupee?
A) FPI inflows into government bonds alone may not be sufficient to support the INR, especially if equity outflows continue. Continued net inflows into both debt and equity are more likely to improve sentiment and provide the currency with some support.
Q) What kind of debt flows could India attract in the next 12-24 months due to these changes?
A) India could attract additional debt inflows of up to $20-25 billion in 12-24 months, driven by potential index inclusion and improved access to FPIs. However, the actual flow will be contingent on global conditions and investors’ risk appetite.
Analyst Disclaimer – Dhawal Dalal is President and CIO of Edelweiss Asset Management Limited (EAML)-Fixed Income and the views expressed above are his own.
Mutual fund investments are subject to market risks, read all scheme related documents carefully. Edelweiss Mutual Fund- SEBI Registration No. MF/057/08/02
(Disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. These do not represent the views of Economic Times)
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