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ING Buys Longer-Term Debt on ‘Benign’ Inflation: India Credit

Indian ventures of the world’s biggest fund managers are buying the most longer-term debt in almost a year after interest-rate increases helped slow inflation from a 19-month high.

ING Investment Management Pvt., a Mumbai-based unit of the largest Dutch financial services company, increased the average maturity of its bond holdings sixfold to six years since July. Birla Sun Life Asset Management Co., Canara Robeco Asset Management Ltd. and DSP Blackrock made similar adjustments. Benchmark 2020 government notes returned 1 percent in the past month, beating the 0.3 percent for 2012 securities.

The notes rallied as the central bank forecast inflation would slow to 6 percent from an 8.5 percent rise in wholesale prices in August, and the government raised its cap on foreign ownership of rupee debt by 50 percent to $30 billion. India’s investment funds more than doubled assets in three years to $160 billion, according to the Association of Mutual Funds in India.

“Our outlook on inflation is much more benign than what it was before,” K. Ramanathan, chief investment officer in Mumbai at ING Investment, said in a phone interview yesterday. “We have increased our average maturity significantly.”

The average tenor of bond funds rose to 6.55 years at the end of August, the longest duration in 11 months, according to New Delhi-based Value Research. A drop of one basis point in the yield of a 10-year note will push its price up more than a similar move in the yield on a two-year note because its valuation needs to factor in more interest-rate payments.

Household Savings

The yield on the 7.80 percent note due May 2020 has fallen 14 basis points, or 0.14 percentage point, from a high of 8.08 percent on Aug. 25 to 7.94 percent today. ING predicted 10-year yields will fall 44 basis points to 7.5 percent by March. That would deliver investors an annualized return of 13.7 percent.

The yield is the highest among major economies except Brazil, where similar-maturity notes pay 11.90 percent. Comparable securities offer 7.70 percent in Russia, 3.32 percent in China and 2.46 percent in the U.S.

The difference in yields between India’s debt due in a decade and 10-year Treasuries grew to 548 basis points from 547 yesterday. The measure, which has averaged 318 in the past 10 years, reached a two-year high of 556 on Aug. 26.

Holdings Grow

Foreign holdings of India’s corporate and government debt have more than doubled in 2010 to a record $17.5 billion on Oct. 4 as yields climbed, according to the Securities and Exchange Board of India. Accelerated investment inflows helped the rupee strengthen 5.1 percent against the dollar in the past month, the best performance among Asia’s 10-most traded currencies.

Local investors are also buying government debt, adding 254 billion rupees to bond funds and pulling out 76 billion rupees from equities in the eight months through August, according to data from the Association of Mutual Funds. Indian households’ savings have more than doubled in the six years ending March 2009 to 12.6 trillion rupees ($283 billon), giving citizens more assets to invest in financial markets.

The economy has expanded an average of 8.5 percent in the past five years, the second-fastest growing major economy after China. Wholesale price inflation, which slowed for a fourth month in August to 8.5 percent, may touch 6.5 percent by the end of March, said ING Investment’s Ramanathan.


The central bank wants to cool inflation to between 4 and 4.5 percent in the medium-term and 3 percent in the long-term, said Reserve Bank of India Deputy Governor Subir Gokarn yesterday. India’s challenge is to keep inflation “under check,” and the monetary authority will seek a balance between sustaining the recovery and reigning in rise in prices, he said.

The Reserve Bank of India has increased its overnight lending rate by 125 basis points this year, the most since the policy tool was introduced in 2000. The repurchase auction rate is 6 percent. As borrowing costs rose, India’s government securities returned 3.6 percent this year, the worst among 10 local-currency debt markets outside Japan, according to indexes compiled by London-based HSBC Holdings Plc, Europe’s largest bank.

“The impact of past monetary policy actions is now beginning to kick in and its effect on curbing inflation will be more visible over the next two to three quarters,” said Gaurav Kapur, a Mumbai-based economist at Royal Bank of Scotland NV. “Higher bank lending rates should cool demand side pressures.”

Yield Difference

Yearly expansion in money supply slowed to 15.2 percent last month from 18.9 percent a year earlier as central bank Governor Duvvuri Subbarao restrained cash to combat inflation. The central bank may increase its benchmark rate by 50 basis points more by March, said Kapur.

Food inflation accelerated to almost a two-month high of 16.44 percent in the week ended Sept. 18 from a year earlier, compared with 15.46 percent the previous week, according to data published by the commerce ministry.

DSP Blackrock, the Indian unit of the world’s biggest money manager, which holds Indian debt with an average maturity of 11 years compared with 9 years in June, will assess global and local economic data before deciding whether to maintain or reduce duration of the bonds, Dhawal Dalal, the head of fixed income at DSP Blackrock in Mumbai said in a phone interview yesterday.

“The worry is that with festival season around the corner you could probably see food inflation passing through to second round of non-food inflation,” said Dalal, who manages the equivalent of $2.5 billion in debt funds, referring to religious holidays running through Nov. 5.

Narrow Deficit

Finance Minister Pranab Mukherjee aims to narrow the budget deficit to 5.5 percent of gross domestic product in the year ending March 31, from a 16-year high of 6.9 percent in fiscal 2010. The federal government’s borrowing target this fiscal year is 4.47 trillion rupees compared with a record 4.51 trillion rupees in the last fiscal year.

In the second half that began in October, the Finance Ministry plans to sell debt securities worth 1.63 trillion rupees. Only a quarter of those bonds will mature in 15 years or more, which may boost demand for debt in that segment, Ritesh Jain, head of fixed-income at Canara Robeco Asset Management in Mumbai, said in a phone interview yesterday.

Demand for longer bonds may increase as insurance companies and pension funds typically boost their holdings before the end of the fiscal year, said Jain, whose company is a venture with Robeco NV, the Dutch money manager owned by Rabobank Groep NV.

“I’m probably sitting on the highest duration in the industry,” said Jain. “There will be demand in the longer end as the shorter end is very volatile.”

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