- Expect inflation to come off going forward, Rodrigues writes
- Prefers 5-10 year part of the curve amid improved liquidity
HSBC Global Asset Management is sticking with its bet on Indian sovereign bonds as Asia’s highest yields help drive the strongest foreign demand for rupee debt since October.
A pickup in monsoon rains has eased inflation concern and the Reserve Bank of India’s cash injections have improved liquidity, adding to the case for favoring the nation’s debt, according to HSBC Global. Investors from abroad have added 67.8 billion rupees ($1 billion) of government and corporate securities in July, heading for the largest inflows in nine months, and halting a two-month run of outflows.
India’s 10-year yield “remains attractive as one third of the world’s sovereign bonds yields have turned negative,” Gordon Rodrigues, the Hong Kong-based head of Asian rates and currencies at HSBC Global, wrote in a note Tuesday.
Sovereign bonds in India are rallying the most since September this month as a revival in rains spurs optimism that better crop output will help contain food costs, which have a strong bearing on consumer inflation. The RBI has injected 800.1 billion rupees through open-market purchases on debt since April, boosting cash supply, while mounting speculation that a successor to Governor Raghuram Rajan will be more aggressive in cutting interest rates has contributed to bond gains.
The 10-year yield ended at 7.25 percent in Mumbai, little changed from its close on Monday that the lowest since June 2013, according to data compiled by Bloomberg. It has dropped 20 basis points in July.
“We expect inflation to stay around the high fives/low sixes and to come off, going forward,” HSBC said in the note. “In terms of system liquidity, RBI has honored its promise on bringing it to neutral from deficit.”
The rupee rose 0.1 percent to 67.2750 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg.
HSBC prefers “the 5-10 year part of the curve which would benefit the most from the improved liquidity scenario,” according to the note. “We are also marginally overweight rupee corporate bonds in the 3-5 year segment and continue to be underweight dollar corporate bonds.”