DespiteIndia’s current struggles, investing directly in India’s fixed income market will yield returns , Steven O'Hanlon, CIO of Fixed Income at ACPI told CNBC.
"At the moment, the India market is predominantly around the government and quasi-government debt," O'Hanlon said. "There is a corporate market, but it is very small. The real focus for us is around the India government market which is getting a very attractive yieldof around 8.5-8.6 percent."
Although the yield is attractive, there are important risks to consider.
"The risks are, first and foremost, if the central bank backs down on a hawkish view on inflationas we’ve seen in the rest of the world," O’Hanlon warned.
However, he believes that India shows long-term investment potential.
"As long as they’re adamant that they’re going to fight inflation first and growth second, as a fixed income investor, it is a lot more comforting than buying into UK gilts or the U.S. where you know inflation is a secondary issue," O’Hanlon said.
Brent crude is currently hitting all-time highs in India, and energy subsidies have nearly doubled in terms of GDPsince 2007.
"India has indicated they are going to reduce the subsidies, and reducing the subsidies is going to increase the prices that we have locally, O'Hanlon said.
As India works to fight inflation, O’Hanlon believes that further quantitative easing (QE) should be avoided, "They can sort the fiscal and monetary policy out themselves, it will happen in time. The one issue they can’t sort out is another round of QE from Western politicians and central bankers which might force oil prices even higher."
The BRICnations of Brazil, Russia, India and China have criticized loose Western monetary policies. In a joint statement, they said growth prospects may be hurt by volatile capital flows and fluctuating commodity prices .
"They need to convince the Western politicians and the central bankers that it is not in their long-term interest to keep putting these inflation problems towards the BRICs which of course will cause them to keep interest rates very high and slow down their economy," O’Hanlon said.