Mumbai: Bond funds doubled their holdings of Indian debt, Asia’s best performing investment-grade market in 2007, predicting currency gains will stop commodity prices from fuelling inflation.
Reserve Bank of India (RBI) governor Yaga Venugopal Reddy allowed the rupee to appreciate 12.3% this year, reducing costs of imported oil, gold and copper. Inflation slowed to a 3.1% annual pace in November, compared with 4.3% in the US and 6.9% in China.
Aberdeen Asset Management Plc., Scotland’s largest independent money manager, and DBS Asset Management Ltd, part of South-East Asia’s biggest lender, are buying Indian bonds to profit from higher prices and the stronger rupee. Debt funds in India, including the local units of Deutsche Asset Management and ING Investment Management, more than doubled this year to Rs2.1 trillion, according to data compiled by the Association of Mutual Funds in India.
“India is bucking a regional trend of higher inflation,” said Edwin Gutierrez, who helps oversee $5.5 billion (Rs21,670 crore) emerging market debt in London at Aberdeen-based Aberdeen Asset, which increased its India debt holdings 50% since June. “Currency strength has helped and I see that continuing.”
Investors measuring performance in dollars earned 19.4% in Indian debt this year, compared with 8.9% for treasury bills, according to data compiled by HSBC Holdings Plc. International investors bought $2.2 billion, twice as much as last year, Securities and Exchange Board of India data show. Local banks hold 70% of the debt and broader ownership may help fund $500 billion for roads and ports over five years.
The yield on the 5.48% bond due in June 2009 fell to 7.76% on Thursday from a six-year high of 8.19% in April. The 10-year yield declined to 7.84% from a four-and-a-half-year high of 8.4% in July 2006.
India’s local currency bonds are rated BBB- by Standard and Poor’s, the lowest investment grade. They returned 6.3% in 2007, second only to Indonesia among 10 Asian debt markets outside of Japan, according to London-based HSBC. Indonesia’s bonds, rated BB+, returned 9.8%.
Rising global money market borrowing costs prompted some investors to shun Indian debt, according to Geneva-based Pictet and Cie., Switzerland’s largest closely held private bank.
“Funding is getting expensive” for investors borrowing dollars to buy rupee debt, said Ting Wee-Ming, who helps manage $2 billion of emerging market debt at Pictet in Singapore. “Indian bonds might not be attractive now.”
India caps foreign holdings at $2.6 billion of the $330 billion government securities market and corporate debt at $1.5 billion because regulators are concerned a sudden outflow of funds would trigger a collapse in the rupee. Global investors currently own $3.5 billion of India debt, government data show.