Monetary easing bias likely to persist; we hold a positive view on Indian and Korean bonds
In 2026, inflation is unlikely to rise above the central bank targets in any of the Asian economies under our coverage, and we still expect rate cuts in India, Indonesia, the Philippines, Taiwan and China.
Most Asian economies have benefited from the recent rate-cutting cycle, which attracted substantial foreign inflows into local bond markets. Foreign institutional investor (FII) flows signal a resurgence of interest in Asia, particularly in Indian and Korean debt, also lending support to local currencies.
In India, strong bond market fundamentals – anchored by robust fiscal discipline and the potential for rate cuts in 2026 – reinforce our positive stance on Indian bonds. Meanwhile, in South Korea, fading rate-cut expectations and the market’s premature pricing of a rate hike have left Korean bonds oversold. Given our view that no rate hikes are likely in Korea and the anticipated inclusion in the World Government Bond Index (WGBI), we remain constructive on Korean bonds. And we expect valuations to normalise.
Positioning for dollar weakness: opportunities in CNY, KRW, and INR
Asian currencies have had a mixed run in 2025, with low-yielders far outperforming the high-yielders like the Indian rupee, the Indonesian rupiah, and the Philippine peso as domestic growth and tariff concerns dominated sentiment. Among those who gained the most were: a) the Taiwanese dollar, supported by strong export performance despite the tariffs, equity market inflows and increased hedging activity by local investors amidst US dollar weakness, b) the Thai baht, benefiting from higher gold prices, and bond market inflows even as domestic growth remained subdued, and c) the Singapore dollar, which avoided the worst of the US tariffs, receiving the lowest retaliatory tariff rate of 10%.
Looking ahead, the softer dollar outlook could provide a tailwind for Asia FX. Tariff risks and growth concerns persist, and in turn, valuation and structural fundamentals will shape FX performance in 2026. Here are the key variables on which we are focused:
- Tariff impact on export growth. While recent trade agreements signal a de-escalation in tensions, they offer limited assurance that export growth will remain robust. The full impact of tariffs on export growth is yet to be seen, as export growth remained rather resilient in 2025. Softer exports and weaker growth are likely to remain headwinds for several regional currencies.
- Valuation dynamics. Inflation differentials have become a more prominent driver of real effective exchange rates in the post-pandemic era, particularly for currencies such as the Chinese yuan, which have benefited from a sharp fall in mainland inflation. Over the year to September 2025, CNY’s real effective exchange rate (REER) declined by 4.6%, while India and Indonesia saw even steeper declines of over 6.5%. The latest REER estimates (as of September 2025) suggest that the Chinese yuan, Korean won, Indian rupee, Japanese yen and Indonesian rupiah have the most room to appreciate, while the Singapore dollar, Malaysian ringgit, Taiwanese dollar and Thai baht appear to have limited upside, with REERs closer to fair value.
- Role of de-dollarisation. Recent US Treasury International Capital (TICS) data indicates that, within Asia, China is the only country consistently de-dollarising. It saw net sales of approximately $137 billion in US securities – primarily US Treasuries and agency bonds – in September 2025. In contrast, Japan and Singapore have been significant net buyers, purchasing around $333bn and $200bn, respectively, largely in US equities. This divergence suggests limited evidence of broad-based de-dollarisation across Asia. This reduces the likelihood of sustained upward pressure on regional currencies from this trend – except for the CNY, which could see some support.
Based on these factors, the CNY and KRW appear best positioned among low-yielders to benefit from an anticipated USD depreciation. The yuan remains undervalued, supported by favourable rate differentials and a strong current account surplus. While growth concerns linger, China’s strategic tariff advantage and resilient trade flows provide additional support. Similarly, the Korean won has room to appreciate amid healthy external balances, with REER adjustments creating scope for appreciation as external balances remain healthy.
Within high-yielders, the INR offers the most compelling upside potential if trade dynamics improve. The rupee was a notable underperformer in 2025, failing to capitalise on its widening rate differential versus the USD. Despite macro stability and a robust external balance sheet, selling pressure persisted amid uncertainty over trade negotiations. Structurally, however, India remains the standout among high-yielders. Fundamentals are solid, fiscal risks are contained, and supply chain diversification continues to attract investment. Should trade talks turn favourable, the INR could stage a meaningful reversal, making it one of the few high-yielders with upside potential in 2026.
Conversely, the IDR and PHP may remain vulnerable. For Indonesia, narrowing real rate spreads and expectations of further Bank Indonesia easing point to continued pressure on the rupiah. Fiscal concerns and sensitivity to rate differentials amplify downside risks. The Philippine peso faces similar challenges, with sluggish growth and tariff headwinds weighing on sentiment. Both currencies are likely to diverge from broader USD trends, reflecting local structural weaknesses.
Bottom line: While tariff risks and growth uncertainty persist, valuation and structural fundamentals will drive performance. We favour the CNY and KRW among low-yielders and see selective upside for the INR among high-yielders, while maintaining a cautious stance on both the IDR and PHP.
