'Cheap' global money flow into India drying up, Pg9

Key Highlights:

• The RBI's 2025-26 annual report expresses concern over high sovereign bond yields and potential interest rate hikes by global central banks due to the West Asia crisis.
• Chief Economic Advisor warns of the end of quantitative easing and near-zero interest rates, calling it a major development in global capital markets.
• 10-year government bond yields in major economies like the US, UK, and Japan have risen significantly from their lows during the COVID-19 pandemic.
• Net capital flows into India have decreased, with 2024-25 seeing only $1.8 billion in inflows and the first nine months of 2025-26 showing net outflows of $580 million.

Detailed Insights:

• Government bonds are debt instruments issued by a sovereign, considered risk-free assets, and their yields serve as a benchmark for setting interest rates across other fixed-income securities.
• From 1999-2000 to 2020-21, bond yields in major economies steadily declined, with some instances of negative yields in Japan due to deflation or currency appreciation.
• The rise in bond yields is attributed to the return of inflation, driven by supply chain disruptions, geopolitical events, and the end of quantitative easing policies by central banks.
• Quantitative easing involved central banks creating new money to purchase government bonds, aiming to boost economic activity, but led to inflationary consequences and increased government debt.
• India benefited from cheap global money, with net capital flows surging until 2023-24, but the trend has reversed, and foreign portfolio investors (FPI) have been pulling out more money than investing since 2020-21.
• The narrowing differential between Indian and US 10-year government bond yields, along with rupee depreciation, makes India less attractive to foreign capital.
• For foreign capital to return, India needs to offer a compelling growth story rather than relying on cheap global money.

Key Concepts Involved:

• Sovereign Bond Yields: The effective annual interest rate on a government's debt instruments.
• Quantitative Easing: A monetary policy where central banks inject liquidity by purchasing government bonds.
• Inflation: A general increase in prices and fall in the purchasing value of money.