Mumbai: Investors should buy India’s bonds because inflation will slow and rising bank deposits will mean more money will flow into debt, according to JPMorgan Chase & Co., the third-biggest bank in the US.
Indian banks are required by the Reserve Bank of India (RBI) to invest 25% of their deposits in government bonds. Deposits rose 22% in the year ended 27 April as the economy grew at the second-fastest pace among major economies, driving interest rates higher.
RBI’s nine increases in borrowing costs since October 2004 will help slow inflation and enable policymakers to keep rates on hold through the second quarter of 2008, wrote Vikas Agarwal and Siddharth Mathur, fixed-income strategists at JPMorgan in Mumbai and Singapore, in a research note. “Indian bonds can benefit in the medium term,” Agarwal said in an interview, confirming the report.
Investors should also buy interest-rate swaps to protect against a hike in money market rates in the coming weeks, Agarwal said.