Emerging market debt markets have benefited from diversification inflows, though this has not meant an even lift to all boats. Bond price action has diverged between high-yielding India and Indonesia debt, with 10Y INR rate rising past 6.6% this week to a five-month high (up ~25bp this month), while Indonesia 10Y yield was at year’s low, below 6.4%. For India, markets had priced out rate cuts after the RBI’s hawkish hold earlier this month. Subsequent conciliatory remarks from the central bank that they will act if required, did not provide much relief. Markets are also wary of the impact of tariffs, softer revenue run-rate, fiscal cost from upcoming GST tax relief, and potential need for further support to businesses (to mitigate tariff related fallout). Fitch affirmed the sovereign’s ratings, not joining its peer S&P in its rating upgrade (S&P upgrades India’s sovereign credit rating). Concurrently, regulatory changes have impinged on demand by local buyers, as investors await a recalibration in duration mix in 2H bond issuance calendar to spur incremental demand. Additionally, the auction size of SDLs (state bonds) exceeded the indicative calendar and was heavy on duration, resulting in a hardening of yields.
Domestic institutional demand for debt is guarded, but foreign investors have ploughed $4.2bn yet far in CY2025 into INR debt. As yields rise, there are calls for the authorities to act, included potential open market operations. Tariff developments are in focus as the additional 25% penalty is due to go into effect today. While exemptions on pharma and semiconductors/ electronics safeguard a fourth of the export basket for now, sectors like gems & jewellery, and textiles remain vulnerable, especially smaller businesses with thin margins. We expect the impact on growth to be in the range of 25-60bp, depending on coverage of the products.
Indonesia 10Y bonds reflect a positive momentum, with yields slipping below 6.4% and front end of curve benefiting more, on the back of expectations of a dovish BI, dollar inflows, rechannelling of demand from slowing supply of SRBIs and a softening US dollar. With markets pricing in a rate cut by the US Fed in September, high yielding papers akin to IDR bonds stand to benefit from rotational flows, imparting a bull steepening impulse on the curve. Foreign interests into IDR debt have been strong at $5.2bn so far in 2025, rotating out of equities. Rates, however, look stretched at current levels with the fiscal run-rate still pointing to a weak revenue trend growth. USDIDR traded within 16200-16400, with attempts to test above running into stiff intervention presence. The country’s wealth fund Danantara plans to issue IDR 50trn ($3.1bn) worth 5Y and 10Y patriot bonds at below market yields of around 2% (less than half of the prevailing 2Y IDR yield). Launch might be planned for early-October, with markets likely to closely track investor appetite for these low-yielding papers.
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