Rising US fiscal pressures and higher global bond yields could create volatility in global markets. However, global brokerage firm Jefferies remains positive on India, saying strong domestic credit growth and capital inflows could act as important buffers against external volatility.
India has seen a sharp improvement in bank credit growth at around 17-18% year-on-year, the fastest pace in more than a decade.
Corporate lending has grown even faster at around 20%, while agricultural and retail loans have increased by 17% and 16%, respectively. Meanwhile, auto and property demand also remain healthy, Jefferies noted.
FCNR-B inflows could rise to $100 billion
Another reason why Jefferies believes that India’s domestic economy is strong enough to support markets is the Reserve Bank of India’s special foreign currency deposit scheme.
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The RBI’s FCNR-B scheme has already mobilised around $41 billion. Jefferies expects total inflows could potentially reach $80-100 billion over the next two months before the scheme closes.
Foreign inflows and tax changes lift Indian bonds
Foreign investment in Indian government bonds has also increased. Foreign investors have brought in $8.7 billion since the government made interest income on Indian government bonds tax-free for them in early June.
Jefferies believes that these inflows could help stabilise the rupee, which had fallen to 96.96 per US dollar in May.
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The brokerage said the recent changes in taxation have also triggered a rally in Indian government bonds. It continues to hold Indian government bonds in its global sovereign debt portfolio.
Foreign investors return to Indian equities
Foreign investors turned buyers of Indian equities in July, recording net purchases of around $2.45 billion. The unwinding of the memory trade, where traders squared off positions in chip companies, helped foreign investors return to Indian equities in July, Jefferies noted.
However, they remain net sellers for the year so far, with net outflows of around $25.4 billion.
What are the US fiscal risks?
While Jefferies remains constructive on India, it has raised concerns about rising fiscal risks in the US.
The US Treasury expects to borrow $739 billion in the quarter ending September 2026, sharply higher than the $190 billion borrowed in the previous quarter. It expects another $628 billion of borrowing in the December quarter.
Jefferies said the higher borrowing requirement could put upward pressure on US Treasury yields.
The brokerage also pointed to the growing gap between US nominal GDP growth and the 10-year Treasury yield. Nominal GDP is growing at around 6.5%, while the 10-year Treasury yield remains about 190 basis points lower.
Jefferies believes this suggests that US Treasury yields could move higher.
TOPICSECONOMYjefferiesThis article was first uploaded on August ten, twenty twenty-six, at twenty-one minutes past six in the evening. © IE Online Media Services (P) Ltd