BlackRock bullish on hope PM Modi will bring stability to markets4 min read . Updated: 08 Sep 2014, 01:28 PM IST
Modi has scaled back government debt sales and sought to cut subsidy payments by raising fuel prices and train fares
Mumbai/Hong Kong: BlackRock Inc. is betting Indian Prime Minister Narendra Modi will bring stability to markets, adding to the appeal of Asia’s highest investment-grade yields amid record buying by global funds.
Foreigners pumped $17.8 billion in 2014 into local debt as the rupee’s three-month implied volatility, a gauge of expected swings, slid 494 basis points to 6.73%. Ten-year sovereign notes pay 8.51% in India, compared with 4.23% in China and about 2.44% in the US. Exchange-rate moves can erase gains from carry trades, in which investors borrow currencies with lower interest rates to buy those with higher yields.
“Carry play is the main reason for the rupee bond positions," said Joel Kim, Singapore-based head of Asia-Pacific fixed income at BlackRock, the world’s largest asset manager. “We remain optimistic on India’s growth. The government led by Modi, in our opinion, is more effective in clearing up the investment pipeline backlog."
Nomura Asset Management Co. and Schroder Investment Management Ltd are also bullish on rupee debt after Standard and Poor’s said last month India’s efforts to improve public finances are positive for the sovereign credit profile. Since taking office after a landslide election victory in May, Modi has scaled back government debt sales and sought to cut subsidy payments by raising fuel prices and train fares.
Finance minister Arun Jaitley has pledged to reduce the budget deficit to a seven-year low of 4.1% of gross domestic product (GDP) in the 12 months through March 2015. The nation also plans to allow more international investment in industries including defence and build more highways, coal-fired power plants, airports and ports to spur the economy.
“We like the new government’s strong commitment to reforms and view its strong majority in parliament as a key positive," Simon Tan, a Singapore-based portfolio manager at Nomura Asset Management, said in an 27 August e-mail interview. “The money manager has been increasing holdings of Indian government and corporate debt," he added.
Signs of an economic pickup and a stronger currency are making Indian bonds more more attractive. GDP rose 5.7% from a year earlier in the April-June period, the most since the first quarter of 2012, official data showed on 29 August. The rupee has appreciated 2.6% in 2014 to 60.24 per dollar, according to prices from local banks compiled by Bloomberg.
India raised a limit on foreign portfolio investment in government securities by $5 billion to $25 billion in July, in response to the unprecedented inflows. It simultaneously cut quotas for sovereign wealth funds to $5 billion from $10 billion, keeping the overall cap on holdings of all rupee debt unchanged at $81 billion.
The nation also set a minimum maturity period of three years for new purchases of government notes. Allocations for sovereign wealth funds were reduced after such investors used less than a quarter of the limit available to them, while other funds exhausted almost all of their quota.
BlackRock is overweight on Indian government bonds, and plans to increase its holdings “at the right price," Kim said in an e-mail interview on 2 September.
The potential for a rally in Indian bonds is limited as the Reserve Bank of India (RBI) flags inflation risks, according to Citigroup Inc. RBI governor Raghuram Rajan left the repurchase rate unchanged at 8% at an 5 August review. Policy rates are at 3% in China and 2.25% in South Korea.
“It’s hard to expect a huge return out of bonds immediately because we have to wait for this whole disinflation process to yield results," Pankaj Vaish, Mumbai-based head of markets for South Asia at Citigroup, said in an interview last month. “The RBI will probably hold borrowing costs until mid-2015 to quell price pressures," according to Vaish, who said that prior to the 5 August policy meeting he’d been expecting a reduction as early as the coming quarter.
The RBI’s resolve to bring the inflation rate down is winning investor confidence, according to Schroder Investment Management. governor Rajan, a former International Monetary Fund (IMF) chief economist, raised the repo rate three times in the past year.
Consumer-price gains have already slowed to 7.96% in July from as much as 11.16% in November, official data show. The RBI’s target is to rein in the pace of price increases within 8% by January 2015.
Bond risk in India fell this year. Credit-default swaps insuring the notes of State Bank of India, a proxy for the sovereign, against non-payment for five years declined 121 basis points to 159, according to data provider CMA.
“The RBI’s monetary policy is a credible one to bring down inflation," Rajeev De Mello, who manages about $10 billion as Singapore-based head of Asian fixed income at Schroder Investment Management, said in an interview on 26 August. “If they are successful, long-maturity bonds will look very attractive." Bloomberg