Singapore: Pacific Investment Management Co., 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, fund manager Chia Liang Lian said.
The money manager has purchased non-deliverable rupee forwards tied to the future value of the rupee, Lian said in an interview in Singapore. 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 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.
Rs.We have added exposure in the higher-yielding names in the region,’’ said Lian, who helps oversee about $10 billion of Asian assets for Pimco from Singapore. Rs.One country that stands out is India. We have for quite some time maintained an overweight allocation’’ via non-deliverable forwards.
While Pimco has trimmed its position, it still has a bigger bet on the rupee than the benchmark indexes it uses to gauge performance, Lian 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. The currency was at 40.848 late yesterday 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, Lian said.
A one-year forwards contract carries an implied rate of about 8.6%, versus a yield of less than 5% for US one-year Treasuries.
Growth in India, second only to China’s 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 mid-April. Governor Yaga Venugopal Reddy said on 24 April strong capital inflows have Rs.complicated the conduct of monetary policy,’ suggesting 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%, versus 9.15% for similar-maturity bonds in Indonesia and 10.04% in Pakistan, the highest in Asia.
India’s strategy to let the rupee climb contrasts with China’s, where the government has so far limited gains in the yuan, Lian said. The rupee has strengthened by 8.4% this year, compared with the yuan’s 1.4% advance.
Rs.There seems to be some acquiescence to letting the currency adjust,’ said Chia.