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

In recent years, India's bond market has been performing exceptionally well, outperforming its historical track record and most other countries, according to India's Deputy Governor at the Reserve Bank of India (RBI), Poonam Gupta. This relative strength of the bond market can be attributed to the government's fiscal commitment and the projected sustained high economic growth rates, which are expected to further enhance fiscal outcomes.

The RBI's September Bulletin highlights that credibility in monetary policy and declining structural pressures on inflation have also played a significant role in bolstering India's bond market. The Economist has even acknowledged India's experience, stating that it demonstrates the importance of cleaning up public finances and allowing central bankers to focus on inflation.

However, the equity markets have not experienced the same level of optimism as the bond market. Gupta attributes this to a comparatively more promising AI-led story in other economies, suggesting that the Indian equity market, which had a remarkable run from June 2022 to September 2024, is now being outperformed by other markets.

Despite the current situation, Gupta remains confident that the promise of India's underlying real economy will eventually make its equities more attractive again, as has been the case historically. The country has traditionally maintained a small current account deficit (CAD) with a larger capital account surplus, resulting in a net positive balance of payments (BOP). The CAD as a percentage of GDP has been declining, which has contributed to the resilience of India's BOP.

Furthermore, the CAD levels have remained significantly lower than the prudent thresholds typically expected for emerging market economies. Net services exports and remittances are significant structural strengths for India, helping to absorb the merchandise trade deficit and keep the CAD below 1% of GDP.