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India’s bond yield premium over the US has narrowed to its smallest in two decades, likely risking fund outflows from local debt.

The spread between the benchmark 10-year India debt and the US has shrunk to about 173 basis points, a level last seen in 2004, according to data compiled by Bloomberg.

Indian bond yields have been declining, driven by the country’s strong fiscal position, easing inflation, and expectations of lower interest rates, according to DBS Bank Ltd. This trend diverges from the US, where unfunded tax cuts have sparked fiscal concerns. The contrast has even led billionaire banker Uday Kotak to wonder whether Indian yields could eventually dip below those in the US.

“This compression is likely to hold given a favorable change in India’s rates backdrop at this juncture, while investors’ worries over US’ fiscal strains are still to be addressed,” Radhika Rao, senior economist wrote in a note.

Foreign funds have poured a net $2.3 billion in rupee debt so far this year, though the current quarter has seen about $4 billion of outflows. While a shrinking yield advantage is negative for emerging markets, India’s strong macros may still ensure some inflows, traders say.

“Though the narrowing spread normally reduce the fund flow to Indian market, this time with sound fiscal position and less riskier currency dynamics we may still get flows in debt market,” said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.

Indian bonds are more integrated with global markets after the addition of local sovereign bonds to key emerging market indexes including those managed by JPMorgan Chase & Co.

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