As foreign institutional investors pull out of the Indian debt market, local buyers have been taking their place. Retail investors invested in debt mutual funds Rs.20,000 crore each in April and May, about 2.5 times the average in the preceding year.
As the chart shows, they have been on the right track for the greater part of this year. Bonds have outperformed equities while gold has fallen far behind. Perhaps this has something to do with a sluggish growth outlook reducing the appetite for equities while sparking hope that the central bank will cut rates to bolster the economy, thereby causing bond prices to rise. However, with the depreciating rupee extinguishing hopes of a rate cut in the near term, bond prices are under pressure. But in the absence of growth, it is also likely that they won’t be overtaken by equities.