Mumbai: Indian debt and rupee may lure overseas investors in 2021, just like the nation's equities with one caveat: the central bank will face more challenges in curbing the local currency's gains against the greenback.
Stocks have already attracted the biggest yearly inflows since 2012, adding to the woes for the Reserve Bank of India that has been buying up the deluge of dollars to curb the rupee's gains. The resulting glut of cash in the financial system has caused short-term rates to crash, which, combined with high inflation, is dampening debt returns for foreign funds triggering a record outflow from bonds.
Sterilization has also caught the eye of US monitors who added India to their watch list for currency manipulators and may force the Reserve Bank of India to let the rupee strengthen against the dollar.
The rupee, Asia's worst-performing currency against the dollar, may rebound along with flows into debt amid a recovery in risk appetite for higher-yielding assets. India was among the five most favored markets, according to a Bloomberg survey of emerging market outlooks for 2021.
"We are constructive on the Indian market next year as India is a high beta market in EM," said Emily Alejos, chief investment officer at Cartica Management in Washington D.C. "We expect all EM to prosper."
Adding to the appeal of Indian assets are efforts by the government and central bank to tackle a historic recession. India ramped up a support package last month to about 15% of the economy. The additional spending together with falling tax revenue means its budget gap will probably widen to 8% of gross domestic product according to economists' estimates, more than double the annual target. However, Finance Minister Nirmala Sitharaman said she would not worry about a wider deficit because of the clear need to spend money.
Meanwhile, earlier this month, central bank Governor Shaktikanta Das promised to maintain an accommodative stance, ruling out rate hikes for as long as would be needed to revive economic growth.