Most recently, the real yields (nominal 5-year government bond yield adjusted for inflation) in Indian bonds have exceeded the threshold of 5%. While we believe this elevated level will be only temporary, we still expect continued positive real rates in the Indian Rupee as it was the case since 2014, when inflation started to fade. India’s attractive real rates are a significant yield advantage as it is well exemplified in chart I. In a world of low nominal yields in general and real yields of only 0% in the U.S. or being even negative in Europe, investments in high quality bonds in economies such as India remain an attractive investment opportunity.
Historically, the Indian Rupee (“INR”) has been a weak currency and the yield advantage of an investor was typically eaten away by a depreciating currency. With India’s paradigm shift in its monetary policy in August 2016 towards an “inflation-forecast targeting” model, the dynamics for the currency have changed meaningfully to the positive.
India implemented an inflation target of 4% for at least the next 5 years (until March 31st 2021). This shall help to increase the macroeconomic stability of the country and keep the inflation in check. The inflation rate shall range within an upper tolerance level of 6% and a lower limit of 2%.
The Reserve Bank of India (“RBI”) steers via its Monetary Policy Committee (“MPC”) the implementation. This policy was set up in consultation with Raghuram Rajan, the former Governor of the RBI.