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Rupee Yield Warms Union Bancaire to EBRD Offshore

February 22, 2013

Rupee Yield Warms Union Bancaire to EBRD Offshore

“We believe that the outlook for the rupee is improving,” analysts at Credit Agricole, including Hong Kong-based Mitul Kotecha, wrote in a Feb. 20 research report. “The rupee is among the top performers over the next few months in our three-and 12-month carry-adjusted grid.” Photographer: Prashanth Vishwanathan/Bloomberg

Foreign borrowers are issuing a record amount of rupee bonds offshore as the Indian government’s biggest economic growth push in a decade gives global funds confidence to seek higher yields in the currency.

The European Bank for Reconstruction & Development and the Inter-American Development Bank were among sellers of 21.4 billion rupees ($392 million) in such securities in 2013, 166 percent of last year’s total and a record start to a year, according to data compiled by Bloomberg. EBRD sold 8.75 billion rupees of one-year notes on Jan. 17 at 5.25 percent, compared with 3 percent for its similar Brazilian real paper.

The so-called synthetic debt is settled in foreign currencies and allows investors to profit from rupee interest rates without obtaining permits to buy bonds onshore. The EBRD notes share the London-based lender’s AAA status, while India’s sovereign debt is ranked the lowest investment grade by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

“It’s mainly the rating that attracts investors to local- currency issues by supranationals; AAA rating exposure to an emerging-market currency,” Zsolt Papp, a Zurich-based senior economist and investment specialist at Union Bancaire Privee, which manages $2 billion of assets, said in a Feb. 19 e-mail. “Regarding Indian bonds, often foreign investors do not have the necessary license to participate in the auctions, or cannot be bothered to go through the process of applying for one.”

‘Catch-up Potential’

Asia’s local-currency debt returned 4.2 percent in the past year, led by an 11.3 percent gain in India, while the region’s dollar-denominated bonds earned 9.3 percent, indexes compiled by HSBC Holdings Plc show. India’s 10-year sovereign notes yield 7.81 percent and offer a premium of 583 basis points over similar maturity U.S. Treasuries, 624 more than German bonds and 262 above Spanish notes.

“Emerging-market local-currency bonds have lagged other emerging-market sovereign and corporate bonds in the last two years, and offer potential to catch up, as well as a higher yield than U.S. or euro-zone treasuries,” Papp said, adding that Union Bancaire Privee will consider buying rupee-debt sold by supranational, or multilateral, issuers.

The EBRD also issued an additional 1.5 billion rupees of an existing note due in June 2014 on Feb. 7, according to data compiled by Bloomberg. The securities are settled in dollars.

‘Positive View’

The lender swapped the rupees into dollars, according to Isabelle Laurent, the London-based deputy treasurer and head of funding at the EBRD. Loans for the development bank are mainly in the U.S. currency and euros, she said.

“We issue in exotic currencies for which there is strong investor demand,” Laurent said in a Feb. 13 telephone interview. “This generally reflects a positive view from fund managers in the relevant currency and the economy.”

Bond risk in India has fallen every month since September, when Prime Minister Manmohan Singh started unveiling policy changes aimed at reviving an economy growing at the slowest pace in a decade, and improving public finances. The government cut taxes on overseas corporate debt, reduced energy subsidies and allowed more foreign investment in industries including aviation and retail. The measures came after Fitch and S&P warned the nation’s ratings may be downgraded to junk.

Default Risk

The cost to insure State Bank of India (SBIN)’s debt, considered a proxy for the sovereign, for five years against non-payment fell 25 basis points this year to 201, according to data provider CMA, which is owned by McGraw-Hill Cos. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Overseas holdings of rupee-denominated bonds sold by India’s government and companies touched an all-time high of $33.7 billion this month, exchange data show. Bank of America Merrill Lynch recommends investors buy the notes as concerns about the currency wane.

The rupee has rebounded 5.3 percent from a record low of 57.3275 touched June 22. It advanced 0.1 percent to 54.4350 per dollar today, while the yield on the 8.15 percent sovereign note was little changed at 7.81 percent.

Credit Agricole CIB sold 107 million rupees of 6.15 percent five-year securities on Feb. 13, its first ever sale in the Asian currency. The notes are settled in dollars.

‘Outlook Improving’

“We believe that the outlook for the rupee is improving,” analysts at Credit Agricole, including Hong Kong-based Mitul Kotecha, wrote in a Feb. 20 research report. “The rupee is among the top performers over the next few months in our three- and 12-month carry-adjusted grid.”

A carry grid entails the purchase of currencies that pay relatively high interest rates, and the concurrent sale of currencies that have low interest rates, at pre-set intervals.

Dollar-based investors will earn 10.9 percent including interest by holding rupees until the end of this year, according to the median estimate in a Bloomberg survey and prevailing deposit rates. That would be the highest in Asia and rank second globally, following Argentina’s 21.8 percent. The Mexican peso will earn 7.6 percent and South Korea’s won 6.8 percent.

While the yield on rupee-denominated debt is attractive to investors, the currency is hostage to global sentiment, according to TD Securities Inc., which arranged a sale of synthetic debt for the EBRD on Feb. 7. Six-month implied volatility, a gauge of expected moves in the exchange rate used to price options, was 9.88 percent today, the highest in Asia after the Japanese yen.

‘Duration Risk’

“There has been an uptick in terms of private banking interest in the Indian rupee, and the fact that these deals are reasonably short-dated and carry less duration risk certainly helps as well,” Sameer Rehman, vice president, fixed income origination and syndication, at TD Securities, said Feb. 15 by telephone from London. “India’s recent pledge to foreign investment reforms certainly signaled to the global investment community that they are committed to liquidity and free market practices.”

India’s government last month raised the cap on foreign purchases of the nation’s bonds by $10 billion to $75 billion. The capital markets regulator received bids worth 781.8 billion rupees from overseas investors for 666.7 billion rupees of permits to purchase bonds offered at a Feb. 20 auction, according to two people familiar with the matter.

“The rupee is discounting market distrust for the government” as well as downgrade risks, Cristian Maggio, a senior emerging-markets strategist at Toronto-Dominion Bank (TD) in London, said in a Feb. 14 e-mail. “With the improvement of the macro picture and the reform agenda being pursued, the positives will outweigh the negative factors.”

To contact the reporters on this story: Tanya Angerer in Singapore at; Jeanette Rodrigues in Mumbai at

To contact the editor responsible for this story: Amit Prakash at

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