Rupee passes Kiwi as target for Japanese fleeing negative rates

Mumbai: Japanese household investors are buying rupee-linked bonds like never before as negative interest rates at home prompt them to take greater risks in search for yield.

The amount of Uridashi notes sold in the Indian currency surged to a record $1.45 billion this year from 105 offerings, making up 6.2% of the total issuance, and surpassing Turkey and New Zealand to enter the top five target nations. The rupee is projected to climb 7.8% against the yen by the end of 2017, the most in Asia, according to surveys of analysts by Bloomberg.

“Pull factors like the improving India growth outlook and relatively attractive yields are driving Japanese investors to such debt,” said Kaushik Rudra, Singapore-based head of rates & credit research at Standard Chartered Plc. There are also “push factors such as the low-yield environment globally and accommodative monetary policy,” he said.

The fastest growth among the world’s major economies, Asia’s second-highest sovereign yields and a stable currency have made India the top pick for several emerging-market investors, including Mark Mobius of Franklin Templeton Investment Funds. BlackRock Inc., the world’s largest money manager, has been increasing positions in local bonds.

Rupee uridashi issuance this year is almost double the $783 million for all of 2015, with offerings from international lenders including Credit Suisse AG and HSBC Bank Plc. In 2014, the currency accounted for just 0.5% of total sales of the securities, which are issued outside Japan and sold directly to the nation’s household investors.

Prime Minister Narendra Modi has burnished India’s appeal through policy changes aimed at boosting growth and improving public finances. Gross domestic product rose 7.1% in April-June from a year earlier, while Japan’s economy grew an annualized 0.7% in that quarter.

The rupee’s total return this half against the US dollar and the yen is 3.3% and 5% respectively, second only to the Indonesian rupiah in Asia. At 5%, the currency’s one-month implied volatility is the least among emerging-market exchange rates tracked by Bloomberg, barring the yuan. Investors are seeking such stability as rising odds of a US interest-rate increase this year weigh on developing-nation assets.

“Investors may prefer rupee uridashi because India’s recent performance is better than other high interest-rate currency countries, implying that the risk of rupee might be lower than other currencies,” said Toru Suehiro, senior market economist at Mizuho Securities Co. in Tokyo. “We expect the Federal Reserve to keep interest rates quite low and emerging currencies to keep their value without outflows to the US.”

Risk appetite

India has been benefiting from sub-zero rates in developed nations. After falling 99 basis points this year, the 10-year sovereign bond yield is still the highest among major Asian markets after Indonesia at 6.77%. Similar-maturity notes offer a negative 0.075% in Japan and 1.78% in the US.

JPMorgan & Chase Co. says Japanese demand for rupee debt could be at risk if cooling inflation causes the Reserve Bank of India to adopt a dovish policy. A monetary policy panel on 4 October cut the benchmark rate to the lowest in more than five years, and official data later showed consumer-price gains slowed to a 13-month low in September.

“The attractiveness of absolute levels of carry is important for retail appetite for this asset class,” said Junya Tanase, chief foreign-exchange strategist at JPMorgan in Tokyo. “Heightened risk-off sentiment, which will possibly be triggered by various events, should hurt the risk appetite” of Japanese individual investors, he said. Bloomberg