RBI Gives Foreigners Reasons to Cheer While Holding India Rates

(Bloomberg) -- The Reserve Bank of India’s hawkish tone and its decision to keep interest rates unchanged at Wednesday’s policy review left local bond traders grappling with losses. But foreign investors are unlikely to complain.

A “detailed review” of rules on overseas investment in debt markets, which the central bank said will be conducted by policy makers, may provide global funds with greater access to the nation’s bonds, which offer the highest 10-year yield among major Asian markets.

Further, the decision to hold rates by itself means that India’s yield gap with the U.S. stays intact. Ten-year rupee sovereign bonds currently pay 440 basis points more than similar-maturity Treasuries. The status quo on rates also underscores the RBI’s pledge to tame inflation, thereby boosting its credibility in the eyes of global investors.

Optimism over future inflows is part of the reason the rupee rallied 0.8 percent versus the greenback on Wednesday, wiping more than a third of its September loss in just one session.