Singh Lures Biggest Inflows Since 2010: India Credit

India's Prime Minister Manmohan Singh
Manmohan Singh, India's prime minister. Photographer: Pankaj Nangia/Bloomberg

The biggest inflows into India’s bonds and stocks in 17 months are bolstering a rally in rupee-denominated debt and allowing the government to resume sales of stakes in state-run companies.

International investors poured $7.3 billion into local assets last month, the most since adding $8 billion in September 2010, according to data from the Mumbai-based Securities & Exchange Board of India. The nation’s notes have returned 2.2 percent this year, the second highest among 10 Asian markets monitored by HSBC Holdings Plc. The rupee has advanced 6.1 percent against the dollar, the best performance among Asia’s 11 most-traded currencies.

Prime Minister Manmohan Singh’s administration raised $2.5 billion last week by selling 5 percent in Oil & Natural Gas Corp., boosting efforts to curb the biggest budget deficit since 2009. The government was forced to increase its bond sales 23 percent more than targeted this fiscal year as slowing economic growth damped revenue.

“The appetite for disinvestment offers is generally high as they give foreigners exposure to good companies,” John Praveen, the Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers, a unit of Prudential Financial Inc. that oversees $900 billion, said in an interview in Mumbai on March 2. “If the government persists with its disinvestment plans and reforms, India may attract more capital and fund flows.”

Auction Speculation

The currency could rally 6.4 percent to 47 per dollar in six months, he predicted.

The BSE India Sensitive Index of shares, which slid the most in Asia last year, has rallied 13 percent in 2012.

The government received bids for 98 percent of the ONGC shares on sale, and more than 95 percent of the bids were placed in the last 10 minutes. A delay in disclosing the results spurred speculation the auction had failed. Sidhartha Pradhan, additional secretary at the Department of Disinvestment, didn’t identify the buyers and told reporters in New Delhi on March 1 the government didn’t ask anyone to bid for the shares. ONGC said yesterday that state-run Life Insurance Corp. of India bought 88.1 percent of the 427.8 million shares offered.

Sensex, Rupee

The rupee’s movements have tracked the Sensex every year since 2006, rising and falling with the benchmark. The gauge plunged 25 percent last year, contributing to the currency’s 16 percent slide, the worst performance among Asia’s most-traded currencies. The rupee has slumped 21.5 percent from a 10-year high of 39.265 reached in January 2008.

The currency will end 2012 at 48.50, according to the median forecast of 25 strategists in a Bloomberg survey. The rupee will return 12.3 percent in the remainder of the year, including interest, the most among the biggest emerging markets. Brazil’s real will earn 9.7 percent, Russia’s ruble 1.9 percent and China’s yuan 3.5 percent.

The rupee may strengthen to 44.50 to a dollar by the end of 2012 “if inflation stabilizes and oil prices stay in the range of $75 to $80 per barrel,” according to San Francisco-based EM Capital Management LLC. Wholesale prices in Asia’s third-biggest economy rose 6.55 percent in January from a year earlier, the least since November 2009, according to government data.

Oil Prices

Brent crude, the benchmark for almost all of India’s oil imports, has surged about 15 percent this year to $123.57 a barrel. The nation imports about 80 percent of its oil requirements, and commodity products have a weighting of more than 15 percent in the inflation basket.

“I am highly confident the rupee will continue to appreciate as the exchange rate is low compared to levels during robust market conditions over the past six years,” San Francisco-based Seth Freeman, chief executive officer at EM Capital Management, said in an e-mailed response to questions on March 2. “The outlook through 2012 is very positive for India. There is still lot of cash available to go into emerging markets equities and India will get its fair allocation.”

The yield on the nation’s benchmark 8.79 percent bonds due November 2021 fell one basis point, or 0.01 percentage point, to 8.22 percent today, taking the drop for this year to 35 basis points.

Budget Deficit

Global funds are adding to holdings of India’s bonds, attracted by the nation’s higher yields. Rupee-denominated debt securities offer investors a yield premium of 623 basis points over similar-maturity U.S. Treasuries, compared with 448 basis points a year ago. International investors have raised their ownership of India’s notes by $5.2 billion in 2012, the best start to a year on record.

The nation’s bond risk is rising on concern efforts to lower the budget deficit to a four-year low of 4.6 percent of gross domestic product by selling stakes in state-run companies won’t be successful. The ONGC sale still leaves India 65 percent short of its 400 billion rupee ($8 billion) target for asset sales in the year through March, according to calculations by Bloomberg.

The government’s deficit in the 10 months through January overshot the target for the entire financial year by 5.3 percent, data on the Controller General of Accounts showed on Feb. 29.

Bond Risk

The cost of protecting the debt of State Bank of India using credit-default swaps cost 310 basis points yesterday, compared with 180 basis points a year earlier, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. Some investors consider the lender a proxy for the sovereign. The swaps pay face value should a company fail to adhere to its agreements.

ING Vysya Bank Ltd., the local unit of the biggest Dutch financial services company and the most-accurate forecaster as measured by Bloomberg Rankings in the six quarters through December, predicts fund inflows will slow.

“I see some amount of weakening in the rupee from these levels,” Upasna Bhardwaj, a Mumbai-based economist at ING Vysya Bank, said in an interview on March 2. “If we were to see oil prices edging up, the currency could weaken to as low as 51 by the end of March.”

Olivier Desbarres, head of foreign-exchange strategy for Asia-Pacific ex-Japan at Barclays Capital in Singapore, expects gains in the rupee to slow at around 48 per dollar, while Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking Corp., Australia’s second-biggest lender, said he isn’t “upbeat” on the currency.

‘Least Crowded’

Global funds may boost their holdings of Indian shares as the Reserve Bank of India eases monetary policy, according to Deutsche Bank AG. International investors raised their ownership of the nation’s stocks by $7.4 billion this year, data from the market regulator shows. The Sensex rose 0.6 percent today to 17,458.39 points.

The gauge may “overshoot” the bank’s target of 18,000 for the year if flows increase, Abhay Laijawala, head of research at Deutsche Equities India Pvt., said in an interview on Feb. 29. CLSA Asia-Pacific Markets raised its March 2013 target for the Sensex to 20,800 last month. The government has identified Bharat Heavy Electricals Ltd., Hindustan Aeronautics Ltd., Steel Authority of India Ltd. and Hindustan Copper Ltd. as companies in which it could sell stakes.

“As money looks for a home, it likely will flow into areas which were down the most last year,” Michael Gayed, the New York-based chief investment strategist at Pension Partners LLC that advises on $160 million of assets, wrote in an e-mailed response to questions. “Money ultimately goes where it is treated best and where it is least crowded, which would be the case in markets like India. The rupee can rally much more than the markets think.”

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