A world-beating rally in India’s equities that has been ‘unusual’ in matching a surge in bond yields may reverse as economic growth is likely to fall short of investors’ expectations, said Credit Suisse Group AG.
The Sensex (BSE) has been rising along with the 10-year government bond yields. That contrasts with countries, including Indonesia and Malaysia where stocks rallied as borrowing costs dropped. Demand for Indian equities is being driven by yield and currency expectations that usually drive up bonds as investors avoid government securities in the nation because of restrictions on foreign buying, according to Credit Suisse.
“The Indian economy has to perform very well if it is to meet the elevated expectations of foreign investors” in equities, Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, said, citing the possible adverse effects of inflation and higher interest rates. “Indian bonds have sold off as equities have strengthened, which has been very unusual in Asia.” Foreign investment in Indian bonds this year is about a third of their stock purchases, which were at a record $30 billion as of Dec. 7. The 13% gain in the Sensex has made it this year’s best performer among the world’s 10 biggest markets, according to data compiled by Bloomberg. Bond yields, which move counter to prices, are close to their highest level in 26 months.
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