Pimco bets on derivatives to earn from high-yielding rupee

Pimco bets on derivatives to earn from high-yielding rupee
Comment E-mail Print Share
First Published: Wed, May 09 2007. 11 58 PM IST
Updated: Wed, May 09 2007. 11 58 PM IST
Singapore: Pacific Investment Management Co. (Pimco), the biggest buyer of emerging-market debt, has bought derivatives to profit from interest rates in India, the world’s second-fastest growing major economy, said fund manager Chia Liang Lian.
The money manager has purchased non-deliverable rupee forwards tied to the future value of the rupee, Chia said. The contracts are attractive because they reflect India’s rate advantage, he said. The nation’s bond yields are the third-highest in Asia.
Global investors are buying derivatives to benefit from India’s yields because they are restricted to owning less than 2% of the $250 billion (Rs10.25 lakh crore) local-currency government debt market. The currency gained 8.2% in the past three months, prompting speculation the Reserve Bank of India stopped buying dollars after a record $11.9 billion of purchases in February.
“We have added exposure in the higher-yielding names in the region,” said Chia, who helps oversee about $10 billion of Asian assets for Pimco from Singapore.
“One country that stands out is India. We have for quite some time maintained an overweight allocation” through non-deliverable forwards, Chia added.
While Pimco has trimmed its position, it still has a bigger bet on the rupee than the benchmark indices it uses to gauge performance, Chia said. Pimco, based in Newport Beach, California, manages with world’s biggest bond fund.
One-year non-deliverable rupee forward contracts traded at 42.115 to the dollar as of 9:22am in Singapore, according to data compiled by Bloomberg.
The currency was at 40.848 late Tuesday (8 May) in Mumbai, after reaching 40.545 on 7 May, the highest since May 1998.
Forwards are agreements to buy assets at a later specified date. A non-deliverable forward involves no physical exchange of currency and is typically settled in US dollars. They are a type of derivative, a contract whose value is derived from stocks, bonds, currencies or commodities or linked to specific events such as changes in interest rates or the weather.
The currency has appeal as a target for the carry trade, in which fund managers borrow in nations with low interest rates to invest in assets with higher returns, Chia said.
A one-year forwards contract carries an implied rate of about 8.6%, as opposed a yield of less than 5% for the US one-year treasuries.
Growth in India, second only to China among the world’s 20 biggest economies, drove a 5.7% gain in the currency in April, its best month since February 1973. The economy grew 9.2% in the year ended 31 March.
The central bank has raised its benchmark overnight lending rate to 7.75%, seeking to curb inflation that reached an annual rate of 6.1% in the middle of April. Governor Y.V. Reddy said on 14 April that strong capital inflows have “complicated the conduct of monetary policy,” suggesting that he may hold off on further rate increases to prevent the rupee from strengthening.
India’s benchmark 8.07% bond due on January 2017 closed at a yield of 8.10%, against 9.15% for similar maturity bonds in Indonesia and 10.04% in Pakistan, the highest in Asia, according to Bloomberg data.
India’s strategy to let the rupee climb contrasts with China’s move, where the government has so far limited gains in the renminbi, Chia said. The rupee has strengthened 8.4% this year, compared with the renminbi’s 1.4% advance. “There seems to be some acquiescence to letting the currency adjust,” said Chia.
Comment E-mail Print Share
First Published: Wed, May 09 2007. 11 58 PM IST
More Topics: Money Matters | Derivatives |