BlackRock: Continues to be bullish on Indian government bonds

Despite the victory of the Indian People's Party led by Prime Minister Modi and its allies in the just-concluded Indian general elections, the results can be described as a Pyrrhic victory: the BJP alliance only won a slim majority of seats, far below the exit poll results and even further from Modi's campaign slogan of "400 seats," triggering concerns in the market about whether Modi's reforms can continue, leading to panic selling of Indian risk assets.

However, the world's largest asset management company, BlackRock, remains optimistic about Indian government bonds.

Neeraj Seth, head of fixed income for BlackRock in the Asia-Pacific region, stated that after Modi's ruling coalition forms the government, it is unlikely to deviate from the path of fiscal consolidation. At the same time, cooling inflation expectations in India will create conditions for the Reserve Bank of India to cut interest rates later this year.

Seth said in an interview with the media that he is bullish on the performance of the Indian bond market and prefers the more liquid 7-year and 10-year government bonds:

It is a good time to hold a bullish position on long-term Indian bonds. Based on the election results, I will not change my positive view on Indian bonds.

He emphasized that although there is a risk of government spending expansion, it is unlikely for a "significant deviation" from fiscal discipline to occur as the Modi alliance still holds the majority. Seth pointed out that the Modi government has excellent fiscal discipline. In the previous fiscal year, the Modi government had already reduced the fiscal deficit to 5.6% of GDP, and it is expected to further reduce the deficit to 4.5% of GDP by the fiscal year 2025/26.

From the perspective of inflation indicators, the growth rate of India's CPI has significantly slowed down, and a rate cut by the Reserve Bank of India is expected to come soon.

The latest data shows that India's CPI rose by 4.83% year-on-year in April, much lower than the high of over 7% last year. Seth believes that this indicates that the Reserve Bank of India can cut interest rates independently of the Fed's decisions:

To some extent, India is one of the few unique economies, and the Reserve Bank of India is one of the few central banks that do not heavily rely on Fed decisions for monetary policy.

The market currently expects that the Reserve Bank of India will not adjust interest rates this Friday.

In addition to the macro situation, Indian bonds also face another major positive catalyst—Indian government bonds may be included in the JPMorgan Emerging Markets Bond Index as early as this month or as late as the second half of the year. This market has already attracted $6.6 billion in foreign capital inflows this year.

Seth stated:

In the next 10 months, the structural fund inflows resulting from being included in the index will bring positive technical factors