JPMorgan Index Seen Rupee Savior as Singh Tinkers: India Credit
Global investors and strategists say India needs to remove all limits on investing in its bond market, after a move to cut red tape helped bolster the rupee.
Lombard Odier Investment Management and Aletti Gestielle Sgr SpA say such opening would allow India to join major bond indexes, boosting inflows. Inclusion in JPMorgan Chase & Co.’s GBI-Global Diversified Index of emerging-market government debt could lure as much as $40 billion over 12 months, according to Standard Chartered Plc.
The rupee rose 1 percent yesterday as Prime Minister Manmohan Singh allowed foreigners to buy sovereign debt without quotas until holdings reach 90 percent of the overall $30 billion limit. The currency slumped 14 percent as investors pulled $8.9 billion from local notes in three months through Aug. 31. Standard Chartered says inclusion in major indexes would limit outflows during such panic selling as investors can’t stray too far from their benchmark’s performance.
“Removing the cap on debt investment is a progressive step which policy makers should consider,” said Nagaraj Kulkarni, a strategist at Standard Chartered in Singapore. “The latest measure is a welcome simplification of an existing process. This alone will be insufficient to reverse the recent outflows.”
The rule change announced by Securities and Exchange Board of India after trading hours on Sept. 13 follows an earlier decision to remove the need for foreign institutional investors to buy quotas for acquiring corporate debt.
Regular overseas investors can buy as much as $25 billion of government bonds and an extra investment of a maximum $5 billion is permitted for long-term investors such as sovereign wealth funds. Both categories of foreigners held a combined 659 billion rupees ($10.4 billion) of debt as of Sept. 16, official data show. Overseas funds held $138.5 billion of equities as of Sept. 13, according to exchange data.
Foreign investors own about 2 percent of India’s $550 billion of rupee-denominated sovereign debt compared with 41 percent in Malaysia and 31 percent each in Indonesia and Brazil, Standard Chartered estimated in a Sept. 12 research note. Romania’s inclusion in JPMorgan GBI-EM index in March was estimated to boost inflows by $2 billion, while the addition of Nigerian debt in October last year was seen to lure $1.5 billion to the country, according analysts at the U.S. bank.
Darrell Wright, head of communications and media relations at JPMorgan in Singapore, said the lender couldn’t immediately comment on India’s case.
“We would expect portfolio inflows to pick up as India joins global indices,” said Holger Friedrich, who manages $490 million of bonds in London at Lombard Odier Investment Manangement. “It would be helpful in the long run, if combined with reasonable macro long-term measures addressing structural weaknesses, not just short-term steps to fix the currency weakness.”
The unit of Lombard Odier & Cie., a Geneva-based private bank that managed $183 billion globally as of June, has a quota to buy Indian government debt, Friedrich said in a Sept. 13 telephone interview. The notes have a 7 percent weight in its in-house index for local-currency debt, he said.
The yield on India’s 7.16 percent rupee-denominated bond due May 2023 fell four basis points, or 0.04 percentage point, to 8.395 percent as of 2:08 p.m. in Mumbai, according to central bank prices. It reached a five-year high of 9.24 percent on Aug. 19. The rupee fell 0.4 percent to 63.11 per dollar.
The cost of insuring bonds of State Bank of India (SBIN), considered a proxy for the government by some investors, against non-payment for five years fell 5 basis points yesterday to 326, a sixth day of decline, according to data provider CMA. The credit-default swaps surged 106 basis points in August, the most since October 2008, and reached a 14-month high of 372 on Aug. 20.
India’s currency and bonds have declined this year as Asia’s third-largest economy expanded 4.4 percent last quarter from a year earlier, the least since the three months ended March 2009, and amid the nation’s twin current-account and budget deficits. Foreign investors pulled $3.7 billion from stocks in the three months through Aug. 31 as capital fled emerging markets amid prospects of the Federal Reserve reducing its record stimulus.
The shortfall in the current account, the broadest measure of trade, widened to a record 4.8 percent of GDP in the year ended March 31, official data show. The Reserve Bank of India considers the gap the biggest risk to India’s economy.
In January 2012, then RBI Governor Duvvuri Subbarao said that though limits for foreign investment in corporate and government debt have been expanded marginally, the changes were only meant to gauge market appetite and were not a sign that caps will be increased further. The central bank prefers non-debt flows over debt flows, he said.
The perception that higher bond inflows would stoke market volatility isn’t entirely true, Standard Chartered’s Kulkarni said. Data compiled by the U.K. lender show yield swings in the past three years have been larger in India than in markets like South Korea, Malaysia and Thailand that have embraced larger inflows, he said.
To be eligible for inclusion in global bond indexes India shouldn’t have explicit capital controls, must allow its currency to be freely traded and encourage foreign participation, Standard Chartered said in its report, citing criteria for benchmarks compiled by banks including JPMorgan.
“India will see committed long-term flows if some of the caps are eased, and that will benefit its economy and investor community,” Walter Rossini, who oversees $200 million of Indian assets at Aletti Gestielle in Milan, said in a Sept. 12 telephone interview. “It will lift confidence by more than just a notch.”