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HSBC Lured by Returns as Barclays Sees Rupee Jump: India Credit

A vendor inspects a one thousand Indian rupee note by holding it to the light at his store in the Dadar wholesale flower market in Mumbai. Photographer: Dhiraj Singh/Bloomberg
A vendor inspects a one thousand Indian rupee note by holding it to the light at his store in the Dadar wholesale flower market in Mumbai. Photographer: Dhiraj Singh/Bloomberg

HSBC Global Asset Management and Daiwa SB Investments Ltd. are attracted to India’s sovereign bonds, Asia’s best performers, as Barclays Plc predicts the rupee will rebound from a record low reached this week.

Indian notes returned 6.3 percent in local-currency terms this year, compared with 5.3 percent for Philippine debt and a 12.9 percent loss in Indonesia, indexes compiled by HSBC Holdings Plc show. The rupee, which touched an all-time low of 61.2125 per dollar on July 8, will strengthen to 58 in three months, according to Barclays.

HSBC Global says the currency’s recent rout provides an “excellent” entry point for investors, after global funds cut their holdings of Indian notes by $8.2 billion following the Federal Reserve’s May 22 signal that it may pare stimulus. The depreciation forced the Reserve Bank of India to refrain from adding to three interest-rate cuts this year that helped push the benchmark 10-year yield to a 44-month low in May.

“The rupee is by far the world’s most-undervalued major currency on a fundamental basis,” Geoffrey Lunt, senior fixed-income product specialist at HSBC in Hong Kong, said in a July 8 telephone interview. “Even if it stays where it is, the yields on the bonds are going to give you quite a handsome return.”

Trading Restrictions

The rupee has rebounded 2.2 percent from its July 8 low to to 59.9050 per dollar after regulators took steps to curb speculation. The RBI barred banks from proprietary trading in currency futures and exchange-traded options, the monetary authority said in a statement the same day. The Securities and Exchange Board of India said separately it will raise margin requirements and cap open positions for such contracts.

Fed Chairman Ben S. Bernanke said July 10 the world’s biggest economy will need stimulus for the “foreseeable future.”

“The rupee will probably not fall as fast as it has done in the past few months,” Kenichiro Ikezawa, a Tokyo-based fund manager at Daiwa SB Investments, which oversees about $51 billion of assets including Indian debt, said in a July 10 interview. “Inflation is slowing and the real rates are quite high, so India remains attractive to me especially when the external situation stabilizes.”

Inflation Outlook

An index of wholesale prices fell to a 43-month low of 4.7 percent in May, official data show, boosting the inflation-adjusted yield on 10-year government debt by 202 basis points this year to 276. The benchmark inflation rate probably rose to 4.94 percent in June as the rupee fell 4.9 percent, the most in the world, according to the median of 26 estimates in a Bloomberg survey before data due July 15.

“Although the nation’s growth is losing steam, downward pressure on the rupee makes it difficult for the central bank to add to its interest-rate cuts to support the economy, which is negative for India,” Takahide Irimura, the head of emerging-market research at Kokusai Asset Management Co. in Tokyo, which manages about $38 billion and runs Japan’s biggest mutual fund, said in a July 10 interview. One cannot avoid being “cautious about rupee-denominated bonds in the short-term as the currency has been weakening at a faster-than-expected pace, and there’s no clear sign of turnaround yet,” he said.

The long-term outlook for the notes is better as the RBI will probably resume cutting rates when the rupee stabilizes and the emerging-market sell-off subsides, Irimura added.

Yield Surge

The yield on benchmark 10-year sovereign bonds has climbed 37 basis points, or 0.36 percentage point, since May 24. It rose one basis point to 7.48 percent today. The local-currency debt offers 493 basis points over similar-maturity U.S. Treasuries, down from this year’s high of 622 on April 5.

Bond risk in India has surged as the rupee weakened. The cost of insuring the debt of government-run State Bank of India, considered by some investors a proxy for the sovereign, using five-year credit-default swaps jumped to 266 basis points on July 11 from this year’s low of 174 on May 17, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.

The rupee is 15 percent undervalued against the greenback, according to Barclays, which predicts the currency will strengthen to 59 per dollar in about a month before extending gains. The lender said the exchange-rate will benefit as it predicts India’s current-account deficit will narrow from a record of 4.8 percent of gross domestic product in the year ended March 31 and as policy makers will take steps such as selling bonds to Indians living overseas to boost inflows.

“While near-term depreciation risks remain, the rupee has fallen significantly since early May,” Barclays analysts including Singapore-based Hamish Pepper, wrote in a July 10 research report. “In this context we expect the currency to appreciate against the dollar over the coming year.”

-- With assistance from Karen Yeung in Shanghai. Editors: Amit Prakash, Sandy Hendry

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