Raghuram Rajan’s rate cut boosts Asia’s best bonds as Aberdeen seeks to add
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Mumbai: It’s not too late to make money from Asia’s best-performing bond market as India cuts interest rates and opens the door to more foreign funds.
The yield on 10-year sovereign notes, which slumped to a two-year low of 7.61% on Tuesday, will drop to 7.40% by year-end, a Bloomberg survey of 15 fixed-income dealers and fund managers shows. Aberdeen Asset Management Plc and PineBridge Investments Llc say they will add to holdings of Indian bonds, predicting more gains after the nation allowed foreigners greater access to its debt and central bank governor Raghuram Rajan surprised investors with a larger-than-estimated interest-rate cut.
A larger quota for overseas investors shows Indian policy makers are growing confident of their ability to protect local assets from volatility induced by global events such as an increase in US interest rates. The move would also help reduce borrowing costs for Prime Minister Narendra Modi’s government as it boosts spending to spur growth in Asia’s third-largest economy.
“Tuesday’s policy is a festive season gift to the markets,” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore. “The move on debt limits is a major positive while the pleasant action on rates shows the central bank is confident about keeping inflation under check and is now moving to focus on growth. Bonds are poised to rally more.”
The Reserve Bank of India (RBI) lowered the benchmark repo rate to 6.75%, the lowest since May 2011, from 7.25%. The move was predicted by just one of 52 economists surveyed by Bloomberg. Forty two expected a 25 basis point cut and nine saw no change. The easing came after consumer-price inflation, the RBI’s benchmark, slowed to a nine-month low of 3.66% in August, staying below the monetary authority’s target of 6% by January for a 12th straight month.
The $30 billion limit on foreign holdings of government bonds will be denominated in rupees rather than in dollars, and the cap will be raised, according to the central bank’s statement. The ceiling will be increased in phases to 5% of outstanding debt by March 2018 and the move will help lure Rs.1.2 trillion ($18.3 billion) of additional investment.
“Together, these moves should boost inflows,” said Leong Lin Jing, an investment manager at Aberdeen Asset in Singapore. “They also signal the RBI’s rising confidence in the resilience of Indian capital markets. We have recently launched an Indian bond fund, so yes, we will be buying more of the nation’s government, quasi and corporate debt.”
Foreigners hold 3.8% of India’s outstanding sovereign debt, according to government estimates. That’s one of the lowest proportions in Asia, with overseas funds holding more than 35% in Malaysia and Indonesia and above 10% in South Korea and Thailand, DBS Bank Ltd says.
Indian policy makers answered calls from global investors including Pacific Investment Management Co., which have been pressing for greater access to bonds offering the second-highest yields in Asia. Foreigners have almost exhausted the $30 billion quota, data from the National Securities Depository Ltd show.
“We would like to buy more rupee-denominated debt,” said Anders Faergemann, London-based senior sovereign portfolio manager at PineBridge Investments. “We have a constructive view on India and the local bond market offers attractive returns.”
The rupee rose 0.4% in a third day of gains to 65.72 a dollar on Wednesday. The 10-year bond yield, which slid 12 basis points on Tuesday to close at its lowest since July 2013, dropped six basis points to 7.55%. Similar-maturity notes pay 9.67% in Indonesia.
“We still see room for a rally despite Tuesday’s move,” said Rohit Arora, a Singapore-based interest-rate strategist at Barclays Plc who predicts the 10-year yield to drop to 7.25% by 31 December, the most bullish forecast in the survey. “We have had an overweight recommendation on Indian government bonds and that stance holds.” Bloomberg