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Business News/ Market / Stock-market-news/  Global funds turns to Indian corporate bonds as sovereign cap reached
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Global funds turns to Indian corporate bonds as sovereign cap reached

Buying by funds such as BlackRock and PineBridge has enabled local companies to raise Rs73,000 crore selling rupee debt this year

India hasn’t expanded the $30 billion cap on foreigners’ sovereign-debt holdings after it was filled, seeking to avoid a repeat of 2013, when concern over Federal Reserve tightening triggered outflows and a plunge in its currency. Photo: MintPremium
India hasn’t expanded the $30 billion cap on foreigners’ sovereign-debt holdings after it was filled, seeking to avoid a repeat of 2013, when concern over Federal Reserve tightening triggered outflows and a plunge in its currency. Photo: Mint

Mumbai: Global funds are turning to Indian corporate bonds after exhausting their sovereign debt quotas, helping cut funding costs for top-rated companies to an eight-month low.

The extra yield on 10-year AAA company notes over similar sovereign paper fell to 53 basis points on 13 March, the least since July, data compiled by Bloomberg show. The gap, now 65 basis points, was as high as 104 last March. Overseas investors have used about 75% of their overall $51 billion cap for corporate debt, up from 58.9% at the end of 2014, official data show.

Buying by funds such as BlackRock Inc. and PineBridge Investments has enabled local companies to raise 73,000 crore selling rupee debt this year, on course to match 2014’s record of 2.96 trillion. India hasn’t expanded the $30 billion cap on foreigners’ sovereign-debt holdings after it was filled, seeking to avoid a repeat of 2013, when concern over Federal Reserve tightening triggered outflows and a plunge in its currency.

India has some really “good, solid companies and if you participate in their growth, you are getting yields, they are getting financing, both benefit," Ajay Marwaha, director for investments at Sun Global Investments Ltd in London, said in a 23 March phone interview. “For investors, it’s frustrating that they can’t buy into the country and that frustration tends to increase as India’s popularity as an investment destination has grown over the last 12 to 18 months."

Yield decline

Foreign holdings of company debt have jumped to 1.82 trillion as of 23 March, from 1.44 trillion at the end of December, data from the National Securities Depository Ltd show.

The yield on 10-year AAA-rated corporate bonds has dropped 19 basis points this year to 8.40% as inflows climbed and the Reserve Bank of India (RBI) twice reduced benchmark interest rates to support growth in Asia’s third-largest economy. Similar- maturity sovereign yields have fallen 11 basis points, or 0.11%age point to 7.75%.

“We have turned to Indian corporate debt market as an alternative," Anders Faergemann, who helps oversee $3.7 billion of emerging-market debt as senior fund manager in London at PineBridge Investments, said in a 23 March e-mail interview. “We believe the central bank should have room to cut interest rates one more time this year, but more so than yield compression, we find the carry quite attractive."

Rupee gains

A stable currency is another factor attracting global investors to Indian debt. The rupee has climbed 1.3% this year in Asia’s best performance and its one-month implied volatility, used to price options, has plunged to 6.43% from last year’s high of 12.34% in April. Investing in rupees will earn 4.7%, including interest, by end-2015, projections compiled by Bloomberg show. That’s the most in Asia.

India has resisted calls to allow fresh investment in government bonds as it seeks to prevent hot money from destabilizing the market. Corporate debt is often avoided by speculators because it can take longer to sell. The rupee sank to an unprecedented 68.845 a dollar in August 2013 on US plans to taper monetary stimulus. The Fed last week signalled it will raise borrowing costs at a relatively slow pace.

RBI governor Raghuram Rajan has said India risks “becoming uncompetitive" as the rest of the world prints money and it needs to have a “bulletproof balance sheet" when US interest-rate increases trigger capital outflows.

Bond risk

Bond risk for Indian firms is falling. The average cost of credit-default swaps protecting the debt of eight local issuers has dropped 35 basis points from this year’s high in January, to 253, according to data provider CMA.

BlackRock is boosting holdings of Indian corporate debt, betting falling oil costs and government policy changes will spur growth, Neeraj Seth, the head of the Asian credit team of the world’s largest asset manager, said in an interview in London on 6 March.

The outlook for India’s $1.9 trillion economy has improved as Prime Minister Narendra Modi, who took power in May, took steps to lure foreign investment, cut red tape and boost infrastructure spending. Gross domestic product (GDP) will expand as much as 8.5% in the year through March 2016, the finance ministry estimates, the fastest pace among the world’s biggest economies.

“Foreign investors are turning to local corporate notes, attracted by the higher yields and an overall improvement in the economic sentiment," Santosh Kamath, chief investment officer for fixed income at Franklin Templeton Asset Management India Pvt., said in a 17 March interview in Mumbai. “The big risk, in our mind, is the Fed risk, which we think will play through the currency route." Bloomberg

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Published: 25 Mar 2015, 10:42 AM IST
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