Govt Bond Yields Higher For All Large Economies Barring India: Client Associates

The Indian economy has been performing well as compared to global counterparts, Real Gross Domestic Product (GDP) growth for the Indian economy for fiscal year 2023 stood at 7.20 per cent, which is well above estimates on account of strong private consumption and better than expected industrial production as a result of higher government capex and robust domestic demand, according to a recent report.

“Current and expected GDP growth for developed large economies has been trailing their respective 10-year historical averages. One reason for this huge underperformance can be attributed to elevated interest rates globally amid supply-side Issues emanating from spiraling geopolitical issues,” said Client Associates (CA) in its report.

Currently, India is the only country where manufacturing activity is expanding which is more than 50 per cent.

The current manufacturing purchasing manager’s index (PMI) for India stands at 57.5, whereas that of the US stands at 49.8, Germany at 39.6 and the UK at 44.3.

10 Year Government bond yields for all the large economies barring India have been trading well above their respective 10 year historical averages.

For instance, the 10-year government bond yield for the US is currently at 4.92 per cent as compared to the 10-year average of 2.32 per cent. Similarly, bond yield for the Eurozone is operating at 4.83 times higher than its 10 year average.

The current bond yield of the US is 4.92 per cent which is 54.74 per cent higher than the 10 year average at 2.32 per cent.

The current bond yields of the Eurozone now stands at 2.9 per cent which is 301 per cent higher than the 10 year average.

“Inflation rates are higher in these developed economies and this is the reason for higher bond yield,” said Rohit Sarin, Co-founder, Client Associates.

Current bond yields for India however are largely in line with historical averages. The expected 10 year bond yield for India in financial year 2025(FY25) is pegged at 6.75 per cent which is well below its 10-year average of 7.20 per cent.

While Global output is likely to moderate to 2.1 per cent in 2023 mainly due to the geo-political crisis in Europe and West Asia and high-interest rates on account of restrictive monetary policies, the Indian economy is likely to grow at 6 per cent plus in FY24 and FY25 on account of structural long-term growth drivers such as domestic consumption and a young working age population.

“There is a high demand in India. Along with favourable policies for investment, especially in infrastructure,” Sarin added.

Indian economic activities are further supported by favorable policies, opportunities arising from a shift in the global supply chain and the Government's thrust on infrastructure spending.

Moreover, India is among a few large economies that are witnessing a positive real rate as inflation is below the short-term interest rates mainly due to effective monetary and fiscal policy management by RBI and GOI, respectively.

“Inflation is below the short-term rate of interest in India. If someone is a bondholder in India, then it may lead to growth of wealth for that person,” Sarin pointed out.

The high-frequency indicators such as credit growth, goods and services tax collections, services and manufacturing PMI, UPI transactions, e-way bills, air traffic, capacity utilisation, electricity production, Index of Industrial Promotion (IIP) and rabi-sowing indicate sustained recovery in domestic economic activities.

“India's macro profile is relatively stable when compared to key Developed and Emerging Market countries. It is likely to experience real GDP growth and earnings growth higher than its 10-year average in FY24. Also, unlike global peers, the one-year forward bond yield in India continues to trade below the long-term averages as a result of expectations of softening domestic inflation,” the report added.