Though India’s Monetary Policy Committee (MPC) has stayed in pause mode for many months, market interest rates have been edging up lately. The 10-year government security, the market benchmark, has seen its yield rise from about 7.15 per cent in mid-September to about 7.38 per cent now. US bond yields have risen in the past month too, with the 10-year treasury moving up from 4.25 per cent to nearly 5 per cent (a 16-year high). This has caused some Indian commentators to ring the alarm bells. With differentials between Indian and US treasuries at about 240 basis points compared to historical levels of 400-500 points, they fear foreign capital will pullout. Should domestic bond yields move up significantly to adjust, they warn, this could derail economic revival. But both the fear of domestic yields spiking sharply due to US factors, and the risk this will pose to growth, seem overblown.
The recent rise in Indian bond yields seems to have been triggered more by local than global factors. Between early April and mid-September 2023, while the 10-year US treasury yield shot up from 3.3 to 4.3 per cent, the 10-year gilt yield in India fell from 7.25 per cent to 7.15 per cent. But with RBI vowing to tighten liquidity since August, domestic rates have moved up in response. US gilt yields, on the other hand, have been rising for quite some time in response to the US government expanding its deficit. The US closed its latest fiscal year (ended September 2023) with a budget deficit of 6.3 per cent of GDP, up from 5.4 per cent in 2022. India, in contrast, is on course to shrink its fiscal deficit from 6.4 per cent in FY23 to 5.9 per cent this year. Thanks to reasonable fundamentals of the economy, narrowing yield differentials have so far not triggered major FPI (foreign portfolio investor) pullouts from Indian bonds. The frothy stock market has seen some outflows in the last two months, but the bond market has retained flows.
It must also be recognised that rising interest rates in the Indian context, unlike in the US, do more good than harm to households. Latest RBI data showed that the stock of household savings parked with banks at ₹115 lakh crore (by end-March 2022), was far higher than their outstanding bank borrowings of about ₹66 lakh crore. Besides, income prospects rather than interest rates influence the buying behaviour of Indian consumers, when it comes to funding home or discretionary purchases with credit.
Given that India’s growth plans are reliant on household financial savings, the Centre must ensure that savers reap the benefits of higher rates. While institutional buyers of government bonds have been benefiting from recent yield increases, small savers in schemes such as PPF have been left out, as rates haven’t caught up. Rectifying this anomaly will not prove costly, as the assets managed by PPF (about ₹ 1.2 lakh crore) are at a fraction of outstanding government borrowings.