Bloomberg News

Schroder Bullish After Surge in Foreign Holdings: India Credit

January 03, 2013

Global fund holdings of Indian debt jumped 26 percent last year to a record and Schroder Investment Management Ltd. says Asia’s highest-yielding investment-grade bonds are worth buying in 2013.

International funds poured $6.9 billion into local-currency government and company securities, boosting ownership to $32.94 billion, according to exchange data. Investments touched an all- time high of $32.99 billion on Jan. 1 and have jumped more than fourfold since 2009. A Dec. 20 offering of bond-purchase quotas to foreigners by the market regulator was oversubscribed, according to two people familiar with the matter.

Schroder sees “good” returns in 2013 after Prime Minister Manmohan Singh unveiled India’s most-aggressive policy changes in a decade to improve public finances and spur growth. Ten-year bonds in India yield 7.99 percent, compared with 3.56 percent in China and 5.14 percent in Indonesia. The rupee will rally 4.7 percent by Dec. 31 in Asia’s best currency gain, according to the median estimate in a Bloomberg survey of 22 banks.

“In an environment where yields are very low globally, there are quite a lot of investors interested in buying higher yields,” Rajeev De Mello, who oversees $7 billion as the head of fixed-income assets at Schroder in Singapore, said in a telephone interview on Dec. 27. “Now that the government has started to implement some reforms, there’s more confidence. We’ve been long on Indian bonds and I’m very optimistic.”

Bond Returns

Indian bonds, rated BBB- or the lowest investment grade by Standard & Poor’s, handed investors 10.9 percent in 2012, the most after a 13.1 percent gain on Indonesian securities among Asia’s 10 biggest local-currency debt markets, according to indexes compiled by HSBC Holdings Plc.

Dollar-based investors will earn 14.6 percent, including interest income, from holding rupee-denominated assets by the end of 2013, according to the median estimate in a Bloomberg survey and prevailing deposit rates. That compares with 6.9 percent on Indonesia’s rupiah, 6.4 percent on China’s yuan and 4.8 percent on Thailand’s baht.

Foreign holdings of rupee-denominated notes rose for a 15th straight quarter in the three months ended Dec. 31 as Moody’s Investors Service reiterated a stable outlook for the nation’s sovereign rating. Indian bonds, along with those of Russia and Poland, will be the biggest gainers among emerging markets in 2013 as confidence in the rupee rises and cooling inflation allows the central bank to cut the region’s highest interest rates, Morgan Stanley predicted last month.

Policy Changes

Since mid-September, Prime Minister Singh has reduced taxes on companies’ overseas debt, cut energy subsidies to improve public finances and allowed more foreign holdings in local- currency bonds and industries including retailing and aviation. In November, India raised regulatory limits on foreign holdings of local government and corporate bonds by $5 billion each to $15 billion and $25 billion, respectively.

The measures helped the rupee rebound 5.3 percent from a record low of 57.3275 per dollar reached on June 22. It fell 0.2 percent to 54.445 today, while the yield on the 8.15 percent government debt due June 2022 fell one basis point, or 0.01 percentage point, to 7.99 percent, according to data compiled by Bloomberg.

“They are trying to incentivize people to come in,” Woon Khien Chia, Singapore-based head of currency and rates strategy for Asia excluding Japan at Royal Bank of Scotland Group Plc, said in an interview on Dec. 28. “Long-term investors are willing to stay as yields are the region’s most attractive.”

Interest Rates

India’s 10-year bond yields slid 52 basis points, or 0.52 percentage point, last year on speculation the central bank will reduce interest rates to arrest an economic slowdown. The extra amount they offer over U.S. Treasuries has shrunk 53 basis points since the end of 2011 to a nine-month low of 616, data compiled by Bloomberg show.

The government cut its estimate for economic growth in the year through March to as little as 5.7 percent, the least in a decade, on Dec. 17. A day later, Reserve Bank of India Governor Duvvuri Subbarao said the focus of monetary policy needs to shift toward supporting the economy from fighting inflation. The RBI has held its repurchase rate at 8 percent since April.

The outlook for Indian bonds remains “positive” because of the prospect of rate cuts, Raymond Lim, Singapore-based head of Asia bonds at Amundi, which manages $919 billion in global assets, said Dec. 7.

No Conviction

Policy makers need to do more to sustain the improvement in investor confidence as a record current-account deficit and rising bad loans in the domestic banking system pose risks, according to Mirae Asset Global Investment Co., South Korea’s second-biggest money manager that oversees about $55 billion.

Indian companies’ gross non-performing loans totaled 1.4 trillion rupees ($25.7 billion) on March 31, up 46 percent from a year earlier, Moody’s Investors Service said in a Nov. 5 report. The shortfall in the nation’s current account, the broadest measure of trade, widened to $22.3 billion in the third quarter of 2012 from $16.6 billion in the previous three months, according to a central bank report on Dec. 31.

“We don’t have conviction in India,” Kim Jin Ha, Seoul- based head of global fixed-income at Mirae Asset, said in an interview on Dec. 27. “There should be more significant signs such as a drop in non-performing loans or budget deficit for us to look into Indian bonds. More aggressive foreign buying may bring some positive changes on the current-account front but we don’t see any fundamental shift for the better yet.”

‘Untapped Potential’

Indian officials met with global investors and sought suggestions to improve fund inflows, Anup Wadhawan, joint secretary in the finance ministry, said Dec. 10. Money managers want a cut in the so-called withholding tax across a wider range of assets, he said. The levy on interest earned by investors and lenders on foreign-currency bonds and loans of Indian firms was lowered to 5 percent from 20 percent for three years from July 1.

The success of the nation’s biggest state-asset sale this fiscal year is boosting confidence in a government plan to rein in its deficit. India raised at least $1.1 billion last month selling shares in iron ore producer NMDC Ltd. (NMDC), aiding Finance Minister Palaniappan Chidambaram’s goal to narrow the budget shortfall to 5.3 percent of gross domestic product by March.

The cost to insure the debt of government-controlled State Bank of India (SBIN), a proxy for the sovereign, slid 169 basis points in 2012 to 226, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.

“There’s a lot of untapped potential in India because, after all, it’s a big market,” Royal Bank of Scotland’s Chia said. “The 1.2 billion population is very attractive for a lot of foreign investors.”

With assistance from Jeanette Rodrigues in Mumbai. Editors: Anil Varma, Sandy Hendry

To contact the reporter on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net


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