Home >Market >Stock-market-news >JPMorgan index seen rupee saviour as Manmohan Singh tinkers

Singapore: Global investors and strategists say India needs to remove all limits on investing in its bond market, after a move to cut red tape helped bolster the rupee.

Lombard Odier Investment Management and Aletti Gestielle Sgr SpA say such opening would allow India to join major bond indexes, boosting inflows. Inclusion in JPMorgan Chase and Co.’s GBI-Global Diversified Index of emerging-market government debt could lure as much as $40 billion over 12 months, according to Standard Chartered Plc.

The rupee rose 1% on Monday as Prime Minister Manmohan Singh allowed foreigners to buy sovereign debt without quotas until holdings reach 90% of the overall $30 billion limit. The currency slumped 14% as investors pulled $8.9 billion from local notes in three months through 31 August. Standard Chartered Plc says inclusion in major indexes would limit outflows during such panic selling as investors can’t stray too far from their benchmark’s performance.

“Removing the cap on debt investment is a progressive step which policy makers should consider," said Nagaraj Kulkarni, a strategist at Standard Chartered in Singapore. The latest measure is a welcome simplification of an existing process. This alone will be insufficient to reverse the recent outflows.

The rule change announced by Securities and Exchange Board of India after trading hours on 13 September follows an earlier decision to remove the need for foreign institutional investors to buy quotas for acquiring corporate debt.

Investment limit

Regular overseas investors can buy as much as $25 billion of government bonds, and 87.3% of this was utilized as of 16 September, according to official data. An additional investment of a maximum $5 billion is permitted for long-term investors such as sovereign wealth funds, of which 11.6% is used. Overseas funds held $138.5 billion of local equities as of 13 September, according to exchange data.

Foreign investors own about 2% of India’s $550 billion of rupee-denominated sovereign debt compared with 41% in Malaysia and 31% each in Indonesia and Brazil, Standard Chartered estimated in a 12 September research note. Romania’s inclusion in JPMorgan GBI-EM index in March was estimated to boost inflows by $2 billion, while the addition of Nigerian debt in October last year was seen to lure $1.5 billion to the country, according analysts at the US bank.

Darrell Wright, head of communications and media relations at JPMorgan in Singapore, said the lender couldn’t immediately comment on India’s case.

Portfolio inflows

“We would expect portfolio inflows to pick up as India joins global indices," said Holger Friedrich, who manages $490 million of bonds in London at Lombard Odier Investment. It would be helpful in the long run, if combined with reasonable macro long-term measures addressing structural weaknesses, not just short-term steps to fix the currency weakness.

Lombard Odier, which managed $43 billion globally as of June, has a quota to buy Indian government debt," Friedrich said in a 13 September telephone interview. The notes have a 7% weight in its in-house index for local-currency debt," he said.

The yield on India’s 7.16% rupee-denominated bond due May 2023 fell six basis points, or 0.06 percentage point, to 8.43% on Monday, according to central bank prices. It reached a five-year high of 9.24% on 19 August.

The cost of insuring bonds of State Bank of India, considered a proxy for the government by some investors, against non-payment for five years fell 5 basis points on Monday to 326, a sixth day of decline, according to data provider CMA. The credit-default swaps surged 106 basis points in August, the most since October 2008, and reached a 14-month high of 372 on 20 August.

Twin deficits

India’s currency and bonds have declined this year as Asia’s third-largest economy expanded 4.4% last quarter from a year earlier, the least since the three months ended March 2009, and amid the nation’s twin current-account and budget deficits. Investors also pulled $3.7 billion from stocks in the three months through 31 August as capital fled emerging markets amid prospects of the Federal Reserve reducing its record stimulus.

The shortfall in the current account, the broadest measure of trade, widened to a record 4.8% of GDP in the year ended 31 March, official data show. The Reserve Bank of India considers the gap the biggest risk to India’s economy.

“In January 2012, then RBI governor D. Subbarao said that though limits for foreign investment in corporate and government debt have been expanded marginally, the changes were only meant to gauge market appetite and were not a sign that caps will be increased further. The central bank prefers non- debt flows over debt flows," he said.

Yield swings

“The perception that higher bond inflows would stoke market volatility isn’t entirely true," Standard Chartered’s Kulkarni said. “Data compiled by the UK lender show yield swings in the past three years have been larger in India than in markets like South Korea, Malaysia and Thailand that have embraced larger inflows," he said.

To be eligible for inclusion in global bond indexes India shouldn’t have explicit capital controls, must allow its currency to be freely traded and encourage foreign participation, Standard Chartered said in its report, citing criteria for benchmarks compiled by banks including JPMorgan.

“India will see committed long-term flows if some of the caps are eased, and that will benefit its economy and investor community," Walter Rossini, who oversees $200 million of Indian assets at Aletti Gestielle in Milan, said in a 12 September telephone interview. “It will lift confidence by more than just a notch."

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