New Delhi: The signalling at the Federal Reserve of the US meeting last week that no more interest rate hikes should be expected during 2019 has ramifications across the globe given the scale of the US economy and the importance of Federal Reserve policy to global investments. From the perspective of the Indian investment community, there are some crucial takeaways and the reiteration of a few existing trends.
First, given that global G-10 bond markets have seen a structural bull trend over the last three decades with interest rates moving lower, from a portfolio allocation perspective, the low long-term bond yields in the developed economies will create significant pressure on investment portfolios for investment return generation.
Hence, the need to look for alternative mechanisms to boost returns will be even greater post the Federal Reserve meeting last week. This search for higher yield from developed market portfolios provides an avenue for emerging markets such as India to attract some of the capital that sits with developed market investors. Relatively dovish central bank policy like the one suggested by the Federal Reserve last week further adds impetus to the trend.
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The second and the biggest takeaway from the signals provided by the Federal Reserve is that the trends such as the availability of large amounts of capital for investment and the move from institutional investors towards more direct investments are here to stay.
As developed economy based investors look towards emerging markets to generate investment returns, India by the sheer size of its market, is a destination for the return-seeking capital.
It is true that while large institutional capital allocations from the pension and the insurance industry do consider the absolute level of interest rates, it is as much true that a lot of the significant portfolio allocation decisions are either long-term or structural given the large portfolio sizes.
Therefore, lower long-end yields in the developed markets provide India with an opportunity to attract long-dated structural funding for mission-critical businesses and infrastructure.
The structural nature of portfolio allocations implies that if attractive investment opportunities are found in India, then the capital being invested does not necessarily face the risk of "capital-flight" even if interest rates were to move significantly higher in the developed economies in the years to come.