India’s bond market performed well, equities to become attractive again: RBI’s Poonam Gupta

As the US bond yields rose to their highest level in 22 years, India's bond market has also performed well in recent years, both compared to its past performance and in comparison with most other countries, the Reserve Bank of India's (RBI) Deputy Governor Poonam Gupta has said.

In the RBI's September Bulletin, she said that the relative strength of the bond market is due to the fiscal commitment of the government, and the projected sustained high economic growth rates that would make the fiscal outcomes even better going forward.

Credibility of monetary policy, declining structural pressures on inflation have contributed as well.


So much so, that for its orderly bond markets, the Economist has remarked that, "India's experience shows the importance of cleaning up public finances and letting central bankers fight inflation in peace".

The equity markets, on the other hand, have not tracked the same optimism, said Gupta.

"This is plausibly because of a relatively more promising AI-led story in certain other economies. While the Indian equity market witnessed an exceptional run of its own, roughly from June 2022 to September 2024, some other economies are having a better run now," she mentioned.

Eventually, the promise of the underlying real economy would reassert itself. Going by the past experiences, it is only a matter of time before Indian equities look relatively more attractive again, she said.

This brings us to the issue of India's balance of payments (BOP) and the direction of rupee. The question often asked is whether the BOP and the exchange rate are reflecting the underlying economic strengths, she noted.

India has traditionally run a small current account deficit (CAD) and a larger capital account surplus, resulting in a net positive BOP. Its CAD as percent of GDP has declined over time, bringing resilience to the BOP.

"Furthermore, the CAD levels have remained far below the levels generally considered to be prudent for emerging market economies. Net services exports and remittances remain its great structural strengths," said Gupta.

Together, they are large and resilient enough to absorb the merchandise trade deficit and keep the CAD contained at below 1 per cent of GDP, she added.