Mumbai/Singapore: Global bond investors seem to be taking the Indian government’s promise of fiscal consolidation with a pinch of salt.
Foreign holdings of rupee-denominated debt have slumped to an 11-month low even after Prime Minister Narendra Modi’s 29 February budget sparked a rally in bonds and the rupee. While the administration retained a goal to narrow the deficit to a nine-year low and announced lower-than-estimated market borrowings, fund managers say they want to see implementation of the proposals and progress on economic reforms before buying.
“We’re yet to see if the budget actually delivers on promises," said Kim Jinha, Seoul-based head of global fixed income at Mirae Asset Global Investments Co., which manages about $73 billion worldwide and is still bullish on Indian bonds. “If the government or the central bank isn’t keeping up with promises, we can witness more outflows before they stabilize, but I doubt we’re going to see another huge outflow given that the government has signalled they’ll do something."
Investors are also watching Reserve Bank of India (RBI) governor Raghuram Rajan, who will host a 5 April meeting and had flagged fiscal discipline as one of the pre-requisites for further easing after four interest-rate cuts in 2015. Another box to tick is Modi’s success in pushing through economic changes including a goods and services tax (GST) that’s currently deadlocked in Parliament.
“The budget has brought a relief to the market," said Caroline Gorman, a London-based investment manager at GAM International Management Ltd., whose team manages $4.1 billion in emerging-market debt. “The next issue to focus on will be any progress on reforms like the passage of the GST."
Foreign holdings of sovereign and corporate notes fell ₹ 450 crore on Tuesday to ₹ 3.36 trillion, after capping a fourth straight week of declines on 4 March. The stockpile dropped ₹ 8,760 crore in February in the biggest monthly slide since April 2014 amid scepticism over Modi’s commitment to the budget goals and a broader selloff in emerging-market assets.
The government aims to borrow ₹ 6 trillion ($88.8 billion) in the year starting 1 April, lower than the ₹ 6.8- trillion median estimate in a Bloomberg survey of 10 analysts conducted before the budget. The 10-year sovereign bond yield dropped the most since October last week, while the rupee capped its biggest gain since September 2013.
Even so, some economists are baffled by how much the government has budgeted for a proposed once-in-a-decade salary increase for civil servants, which is estimated to be about ₹ 1 trillion. The allocation is crucial to determining the credibility of Modi’s plans to narrow the fiscal gap to 3.5% of gross domestic product (GDP) in the year ending March 2017.
Demand for sovereign securities is also being hurt by competition with state-government notes. The average spread between yields on bonds issued by federal and state administrations has widened to about 100 basis points, from around 50 basis points in the last five years, according to Tata Asset Management Co.
Investors have earned 0.8% on rupee sovereign notes so far this year, the least among major Asian markets tracked by Bloomberg. The securities were the region’s top performers in 2015 and 2014, with returns of 8.1% and 16.5%.
Rajeev De Mello, who oversees about $10 billion as head of Asian fixed income at Schroder Investment Management Ltd. in Singapore, said the recent rebound in global oil prices “could be another reason why you’re seeing a little bit of underperformance."
“I wouldn’t chase the market right now," he said, predicting that the central bank will cut the repurchase rate by 25 basis points in April. “We have been positive and positioned already for lower yields." Bloomberg