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Schroder Sees Bond Rally as Foreigner Cap Raised

December 04, 2012

Schroder Sees Bond Rally as Foreigner Cap Raised

One-month implied volatility for the rupee, a measure of expected fluctuations used to price options, is at 10 percent, according to data compiled by Bloomberg, the highest in Asia. Photographer: Prashanth Vishwanathan/Bloomberg

Aberdeen Asset Management Plc (ADN) and Schroder Investment Management Ltd. said monetary easing and a plan to let foreigners buy more Indian debt will spur gains in the highest-yielding bonds among major Asian economies.

The limit on holdings of sovereign and corporate debt was increased by $5 billion each last week as the government plans record borrowings to fund its budget deficit amid the slowest economic growth since 2009. India’s benchmark 10-year debt yields 286 basis points more than Indonesian similar-maturity debt, an eight-month high.

“Raising the foreign investment cap is probably sensible given in all likelihood they’ll be seeing some fairly notable fiscal slippage,” Kenneth Akintewe, a Singapore-based fund manager at Aberdeen, said in an interview on Dec. 3. “There’s demand for government debt, which the government has typically restricted access to. They should be encouraging and allowing far more foreign investor participation in the market.”

Overseas holdings of rupee debt have risen $6.1 billion this year to $32.2 billion as the Reserve Bank of India loosened policy and the government unveiled a slew of policy changes to avert a debt rating downgrade. Central bank Governor Duvvuri Subbarao said Oct. 30 there’s a “reasonable likelihood” of an interest-rate reduction next quarter as inflation is expected to slow. The next RBI review is due Dec. 18.

“Indian yields stand out in the entire region and are very attractive,” Rajeev De Mello, who oversees $7 billion as the head of fixed-income assets at Schroder Investment Management Ltd. in Singapore said in a telephone interview yesterday. “There are expectations of rate cuts by early next year, and that should be generally positive for Indian bonds.”

Yield Comparison

India’s benchmark 10-year bond yield was little changed at 8.17 percent yesterday. That’s higher than the 3.5 percent in China, 4.5 percent in the Philippines and 5.4 percent in Indonesia. The spread to Indonesia is “very high,” said De Mello.

Subbarao will cut the benchmark repurchase rate to 7.50 percent from 8 percent by March, according to 11 of 19 analysts surveyed by Bloomberg News. Two expect no change, five predict a cut to 7.75 percent, one to 7 percent.

The governor has refrained from adding to a 50 basis-point reduction in April as inflation remained above the central bank’s comfort of around 5 percent. He lowered reserve requirements for banks to a 36-year-low of 4.25 percent to free up funds for lending.

RBI Forecasts

Subbarao cut the RBI’s growth forecast for the fiscal year ending March 31 from 6.5 percent to 5.8 percent, the least in a decade, raised its estimate for gains in wholesale prices from 7 percent to 7.5 percent and said consumer prices will stay elevated mainly due to food costs. Gross domestic product rose 5.3 percent in the July-September quarter, government data show, matching the slowest pace since 2009.

The 10-year sovereign yield has dropped 40 basis points this year, data compiled by Bloomberg show, heading for the first annual decline since 2008. The rate may drop a further 37 basis points to 7.80 percent by the end of March, according to the median forecast of eight economists surveyed by Bloomberg.

Prime Minister Manmohan Singh has stepped up efforts since mid-September to improve government finances and revive the economy, cutting energy subsidies and allowing more foreign investment in industries including aviation and retailing.

The policy measures came after Standard & Poor’s and Fitch Ratings lowered India’s sovereign credit outlook, citing a widening budget deficit and a slump in economic growth and investment. Both companies rank India’s debt BBB-, the lowest investment grade.

Budget Deficit

The budget shortfall will be 5.6 percent of GDP this fiscal year, compared with the government’s 5.3 percent target, according to the median estimate of six investors and analysts surveyed last week by Bloomberg News, as slower growth crimps revenue. The deficit was 3.68 trillion rupees ($67.3 billion) in the seven months through October, according to government data, or almost 72 percent of the annual target.

A volatile currency and restrictions on foreign holdings of local debt may deter investors, Walter Rossini, who manages about $200 million in Indian assets at Aletti Gestielle SGR SpA in Milan, said by telephone yesterday. “These together can change the timing of the flows into the markets,” he said.

Volatile Rupee

One-month implied volatility for the rupee, a measure of expected fluctuations used to price options, is at 10 percent, according to data compiled by Bloomberg, the highest in Asia. India’s currency fell 6.4 percent in the past year in the second worst performance among the region’s 11 most-traded currencies. It rose 0.2 percent to 54.6850 per dollar yesterday.

Global investors are required to bid for quotas to buy Indian bonds that must be utilized within a specified period, and come with restrictions such as minimum lock-in periods.

Rupee-denominated debt returned 9.6 percent this year, the best performance after Indonesia among Asia’s biggest local- currency fixed-income markets, HSBC Holdings Plc data show.

Credit risk for government-controlled State Bank of India, considered a proxy for the sovereign by some investors, touched a 15-month low of 239 basis points on Dec. 3. The cost of insuring the Mumbai-based lender’s debt for five years against non-payment using credit-default swaps fell 156 basis points this year, according to data provider CMA.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements.

“At current levels, Indian yields are attractive for global investors,” Sri Prasad Prabhu, the head of fixed-income at IDBI Federal Life Insurance Co. in Mumbai, said in a telephone interview yesterday. Increasing the limit on overseas holdings is “a welcome move and will continue the process of widening of debt market. Foreign institutional investors generally prefer shorter-term instruments, so it will increase liquidity in the front end of the yield curve,” he said.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at

To contact the editor responsible for this story: James Regan at RBI IN <Equity>

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