The inclusion of government bonds in the Bloomberg index would have seen inflows of $30-$50 billion into the debt market, a top Canara Bank official said.
The delay in inclusion is seen as a setback as the government scrapped the withholding tax and capital gains tax on overseas bond investors to attract inflows.
“Deferment in inclusion in the Bloomberg index has been a little unexpected as India met most of the criteria. It would have added around $30-$50 billion to debt market flows,” Brajesh Kumar Singh, managing director and chief executive officer of Canara Bank, said.
Singh believes the Reserve Bank of India’s decision to keep the benchmark repo rate unchanged would be supportive of keeping bond yields in a range. “Aided by lower crude prices, a pause in the repo rate and stable inflation, bond yields are expected to stay in the 6.75-6.85% range.”
According to Singh, softening of crude oil prices played a key role in influencing the decision of the monetary policy committee (MPC). “Brent crude falling below $80 per barrel has been a major reason behind keeping rates on hold, as the RBI had based its inflation forecasts on crude averaging $95 in the June MPC. Taking comfort from this, retail inflation forecast for FY27 has been reduced by 10 bps to 5%.”
On liquidity, Singh noted that it is in surplus and has averaged around Rs 1 lakh crore since the beginning of this fiscal due to FCNR(B) inflows, overseas foreign currency borrowings and external commercial borrowings totalling $40.82 billion.
Despite advance tax, GST flows, disinvestments and higher CD ratio reducing the surplus, FCNR (B) flows will prevent a persistent deficit in liquidity, he added.
Singh expects credit offtake to remain strong and be in the mid-teens this fiscal. “Despite being a lean quarter seasonally, Q1 showed strong credit growth. There is no reason why subsequent quarters should not maintain this momentum or even surpass it,” he said.