Bumper foreign inflows were a significant driver of Asia FX through late 2020 (Chart 1). The Bloomberg EM Capital Flows index was up 16.5% QoQ in Q4, pushing YTD inflows back into positive territory in December. Foreign inflows helped push EM equity markets to new highs and meant rising FX intervention for Asian central banks. We see several reasons why inflows should remain robust and EM Asia the main beneficiary.

Yield Pickup Remains Attractive in Parts of Asia

Despite the jump higher in US yields since the start of the year, Asia’s attractiveness as a carry play is secure. 10-year bonds in Indonesia and India are 517bps and 481bps above 10-year US Treasuries, down from earlier highs but still very attractive (Chart 2). India is widely expected to resume its easing cycle given the recent drop back in inflation. But with the RBI pulling back on liquidity provision in recent weeks and short-term rates rising, we expect a cautious approach on further easing. In Indonesia, the easing cycle is likely over, or close to, despite below-target inflation. And worries over the debt monetization and BI’s independence will keep yields elevated despite the very severe COVID situation.