India New Year Greeting to Global Bond Funds Sets Tone for Rupee

  • Barclays bullish as investment limits to rise by $2.5 billion
  • Rupee shows strength with longest winning run since 2011

India will be laying out the welcome mat to global bond funds on day one of 2016. Given the rupee’s strength, it’s perfect timing.

Overseas investors get access to an additional 165 billion rupees ($2.5 billion) of sovereign and state-government notes from Jan. 1, part of a September plan to phase in looser foreign-investment limits. The currency is the best performer in emerging Asia this month, it completed the longest run of daily gains since 2011 on Monday and expectations for price swings are at the lowest since July.

“The limits will be filled up instantly,” said Kim Jinha, Seoul-based head of global fixed income at Mirae Asset Global Investments Co., which manages $73 billion worldwide. “India is a relative safe haven among emerging markets.”

Barclays Plc says it is bullish on Indian government bonds and the quota offering presents an opportunity to enter the market cheaply given the ongoing holiday season. Appetite for developing-nation assets is improving after the Federal Reserve laid out a gradual path of interest-rate increases, with deposits into U.S. emerging-market exchange-traded funds climbing at the fastest pace in two months last week.

Foreign holdings of Indian debt have dropped 115.2 billion rupees over December and November, set for the biggest two-month outflow since 2013. They surged by 146.8 billion rupees in October, as global funds rushed to buy after the first increase in limits under the September plan took effect.

The rupee jumped 1.4 percent in the eight days through Dec. 28, the longest stretch of gains since June 2011, with Edelweiss Financial Services Ltd. and RBL Bank Ltd. predicting the increase in debt limits will spur more gains. The currency has risen 0.3 percent in December to 66.46 a dollar, and its one-month implied volatility, used to price options, slumped to 5.52 percent on Wednesday, the lowest since July 24.

Investing in rupees will earn 2.5 percent including interest by March 31, the most in Asia, estimates compiled by Bloomberg show. The yield on India’s benchmark 10-year sovereign bonds has fallen three basis points this month to 7.76 percent and remains the highest in the region after Indonesia.

“We remain bullish on Indian government bonds,” Rohit Arora, an interest-rate strategist at Barclays in Singapore, wrote in a Dec. 28 note. “With most markets closed on Jan. 1 and given the ongoing holiday season, we expect a weak quota auction cutoff. Unexpectedly strong demand despite the unusual timing, on the other hand, could be seen as a positive technical signal for broader emerging-market local-currency bond flows in the near term.”

Bond Risk

Global holdings of Indian sovereign and corporate securities rose by 487 billion rupees this year as tumbling crude oil prices improved public finances in Asia’s third-largest economy and helped slow inflation, enabling the central bank to lower benchmark interest rates four times.

Bond risk has plunged this quarter. Credit-default swaps insuring the notes of State Bank of India, a proxy for the sovereign, against non-payment for five years have dropped 24 basis points since Sept. 30, the most in five quarters, to 159, according to data provider CMA. Ten-year notes pay 548 basis points over similar-maturity U.S. Treasuries, compared with a two-year low of 534 in June.

“The new limits would get filled up as there’s a fair bit of interest among foreign investors,” said Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management Pvt., which oversees 892 billion rupees. “On a relative basis, India’s macroeconomic fundamentals are good and with financial markets stable post the Fed’s rate increase, demand for Indian bonds should be robust.”

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