The Reserve Bank of India (RBI) seems to ensure that inflation is tamed before cutting interest rates.
Overseas investors have been buyers of local debt for seven straight months, the longest run of inflows in four years, taking their holdings to a record $49.2 billion as of 26 November. Borrowing in dollars to invest in rupees has returned 7.8% this year, the highest after Argentina’s peso among 23 emerging-markets carry trades .
RBI governor Raghuram Rajan is forecast to leave one of Asia’s highest benchmark rates unchanged on Tuesday, and signal possible easing next year as cheaper oil helps keep inflation below his January 2016 target. Global funds have flocked to buy Indian assets after he stabilized the rupee by raising borrowing costs, gold-import curbs narrowed the current-account deficit and the new government cut red tape.
“India is a strong conviction trade for us in the medium term,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet, which oversees $25 billion of emerging-market debt, said by phone on 28 November. “We are overweight India bonds and will likely stay overweight for quite some time.”
Policy outlook
Rajan will keep the repurchase rate at 8% on Tuesday, according to 40 of 43 analysts. Three forecast a cut to 7.75%. Economists at Goldman Sachs Group Inc., Citigroup Inc. and Barclays Plc predict it will be lowered to 7.50% in the first six months of 2015. Growth in Asia’s third-largest economy slowed for the first time in three quarters, to 5.3% in the three months ended 30 September, official data showed 28 November.
Government bonds rallied this quarter, with the 10-year yield dropping 42 basis points to 8.09%, as a 35% decline in Brent crude prices from 30 June cooled inflation in the nation that imports about 80% of its oil. The notes have returned 14.1% this year, the best in Asia.
HSBC counts the securities among its top Asian trades in 2015 and predicts the yield will reach 7% by the end of next year and as low as 6% by end-2016, Andre de Silva, the bank’s Hong Kong based head of Asia-Pacific rates research, wrote in a 20 November report.
‘Top bonds’
India’s sovereign notes “rank top among Asian bonds in terms of carry, capital and to a certain degree, currency gains,” de Silva wrote. “Lower crude prices provide another reason to be overweight government securities as it allows the government to reduce subsidies while taming the current-account deficit and inflation.”
The rupee has surged 10% from an all-time low in August 2013 after Rajan raised rates three times in the September to January period. The currency has weakened 0.4% this year, the smallest decline in Asia after Indonesia’s rupiah and Thailand’s baht. It fell 0.3% to 62.0350 per dollar on 28 November.
India’s foreign reserves rose to $314.9 billion as of 21 November, from $275 billion in August last year, after reaching a near record $321 billion in July. Lower oil prices will help reduce the current-account gap to 1.5% of gross domestic product (GDP) in the year ending March 2015, compared with 1.7% in the previous year, according to HSBC.
Investor confidence
Foreigners poured a net $40.3 billion into Indian bonds and stocks this year as Rajan’s measures boosted investor confidence and Prime Minister Narendra Modi pledged to revive the economy from the worst slowdown in a decade by easing rules on foreign investment and building roads, ports and railways.
“If they continue on what they are doing at this point in terms of policy execution, I won’t be too surprised to see a 50 to 55 range for the currency in the next 12 months,” Adeline Ng, the Singapore-based head of Asian fixed income at BNP Paribas Investment Partners, which oversees $622 billion, said in a 18 November interview in Hong Kong.
While inflows have surged, further buying will depend on whether the RBI raises the current cap on sovereign debt ownership by foreign investors of $25 billion, according to Elara Securities Pvt. Almost 98% of the limit had been used as of 27 November, exchange data show.
‘Policy makers skeptical’
“The policy makers are skeptical about allowing too much short-term money very quickly after the last year’s experience, when the rupee tumbled on outflows,” Ashish Kumar, an economist at Elara in Mumbai, said by phone on 28 November. “The preference is for a long-term flows by way of foreign-direct investments and equities, and then debt.”
Consumer prices rose 5.52% in October from a year earlier, the least since the index was created in early 2012, and lower than Rajan’s January 2016 target of 6%. India’s 10-year sovereign bonds now pay an inflation-adjusted yield of 256 basis points, or 2.56 percentage points, the highest since at least January 2012.
“We continue to like Indian bonds based on the determination of the RBI to bring down inflation,” Rajeev De Mello, who manages about $10 billion as the head of Asian fixed income at Schroder Investment Management Ltd in Singapore, said in a 28 November e-mail interview. “A mild depreciation of the rupee will not offset the significant carry earned by investing in Indian bonds.”
Overseas investors have been buyers of local debt for seven straight months, the longest run of inflows in four years, taking their holdings to a record $49.2 billion as of 26 November. Borrowing in dollars to invest in rupees has returned 7.8% this year, the highest after Argentina’s peso among 23 emerging-markets carry trades .
RBI governor Raghuram Rajan is forecast to leave one of Asia’s highest benchmark rates unchanged on Tuesday, and signal possible easing next year as cheaper oil helps keep inflation below his January 2016 target. Global funds have flocked to buy Indian assets after he stabilized the rupee by raising borrowing costs, gold-import curbs narrowed the current-account deficit and the new government cut red tape.
“India is a strong conviction trade for us in the medium term,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet, which oversees $25 billion of emerging-market debt, said by phone on 28 November. “We are overweight India bonds and will likely stay overweight for quite some time.”
Policy outlook
Rajan will keep the repurchase rate at 8% on Tuesday, according to 40 of 43 analysts. Three forecast a cut to 7.75%. Economists at Goldman Sachs Group Inc., Citigroup Inc. and Barclays Plc predict it will be lowered to 7.50% in the first six months of 2015. Growth in Asia’s third-largest economy slowed for the first time in three quarters, to 5.3% in the three months ended 30 September, official data showed 28 November.
Government bonds rallied this quarter, with the 10-year yield dropping 42 basis points to 8.09%, as a 35% decline in Brent crude prices from 30 June cooled inflation in the nation that imports about 80% of its oil. The notes have returned 14.1% this year, the best in Asia.
HSBC counts the securities among its top Asian trades in 2015 and predicts the yield will reach 7% by the end of next year and as low as 6% by end-2016, Andre de Silva, the bank’s Hong Kong based head of Asia-Pacific rates research, wrote in a 20 November report.
‘Top bonds’
India’s sovereign notes “rank top among Asian bonds in terms of carry, capital and to a certain degree, currency gains,” de Silva wrote. “Lower crude prices provide another reason to be overweight government securities as it allows the government to reduce subsidies while taming the current-account deficit and inflation.”
The rupee has surged 10% from an all-time low in August 2013 after Rajan raised rates three times in the September to January period. The currency has weakened 0.4% this year, the smallest decline in Asia after Indonesia’s rupiah and Thailand’s baht. It fell 0.3% to 62.0350 per dollar on 28 November.
India’s foreign reserves rose to $314.9 billion as of 21 November, from $275 billion in August last year, after reaching a near record $321 billion in July. Lower oil prices will help reduce the current-account gap to 1.5% of gross domestic product (GDP) in the year ending March 2015, compared with 1.7% in the previous year, according to HSBC.
Investor confidence
Foreigners poured a net $40.3 billion into Indian bonds and stocks this year as Rajan’s measures boosted investor confidence and Prime Minister Narendra Modi pledged to revive the economy from the worst slowdown in a decade by easing rules on foreign investment and building roads, ports and railways.
“If they continue on what they are doing at this point in terms of policy execution, I won’t be too surprised to see a 50 to 55 range for the currency in the next 12 months,” Adeline Ng, the Singapore-based head of Asian fixed income at BNP Paribas Investment Partners, which oversees $622 billion, said in a 18 November interview in Hong Kong.
While inflows have surged, further buying will depend on whether the RBI raises the current cap on sovereign debt ownership by foreign investors of $25 billion, according to Elara Securities Pvt. Almost 98% of the limit had been used as of 27 November, exchange data show.
‘Policy makers skeptical’
“The policy makers are skeptical about allowing too much short-term money very quickly after the last year’s experience, when the rupee tumbled on outflows,” Ashish Kumar, an economist at Elara in Mumbai, said by phone on 28 November. “The preference is for a long-term flows by way of foreign-direct investments and equities, and then debt.”
Consumer prices rose 5.52% in October from a year earlier, the least since the index was created in early 2012, and lower than Rajan’s January 2016 target of 6%. India’s 10-year sovereign bonds now pay an inflation-adjusted yield of 256 basis points, or 2.56 percentage points, the highest since at least January 2012.
“We continue to like Indian bonds based on the determination of the RBI to bring down inflation,” Rajeev De Mello, who manages about $10 billion as the head of Asian fixed income at Schroder Investment Management Ltd in Singapore, said in a 28 November e-mail interview. “A mild depreciation of the rupee will not offset the significant carry earned by investing in Indian bonds.”
