HSBC Sees Flows Into Debt Extending After Gold Tax: India CreditJeanette Rodrigues and David Yong
India’s move to curb gold imports to improve its current account is buoying confidence in the rupee, prompting HSBC Global Asset Management to bet foreign holdings of local debt will extend last year’s 26 percent surge.
An offering of bond-purchase quotas to foreigners by the market regulator was oversubscribed on Jan. 21, according to two people familiar with the matter, the same day government raised the tax on bullion shipments to 6 percent from 4 percent. Dollar-based investors will earn 10.2 percent, including interest income, from holding rupees this year, based on the median estimate in a Bloomberg survey. That would be the highest in the world after 10.7 percent on Argentina’s peso.
Efforts by Prime Minister Manmohan Singh’s administration to damp demand for gold, India’s biggest import after oil, may drive money into financial markets, helping extend gains in Asia’s best-performing bonds. Singh has put his popularity on the line to avoid a cut in the nation’s debt rating to junk, cutting energy subsidies and allowing more foreign investment.
“We are bullish on rates and also on the currency in the short-term,” Gordon Rodrigues, investment director in Hong Kong at HSBC Global Asset Management, which oversees $32 billion of Asian fixed-income assets, said in an interview yesterday. “The latest debt-quota auction results tell us that the market has confidence in the government. I think this policy momentum will continue and I don’t think we’ll have populist measures in the budget, even though 2014 is an election year.”
The gold tax increase is part of the government’s policy changes aimed at boosting investor confidence, said Rodrigues.
Rupee-denominated sovereign securities handed investors 11.1 percent in the past year, the most among Asia’s 10 biggest local-currency debt markets tracked by HSBC Holdings Plc. Funds based abroad bolstered holdings of Indian government and company bonds by $6.9 billion in 2012 to $32.9 billion, according to data from the Securities & Exchange Board of India.
The yield on the benchmark 10-year government debt has slid 71 basis points, or 0.71 percentage point, since the end of 2011, compared with a 16 basis point rise in similar rates in China, data compiled by Bloomberg show. The amount paid by the 8.15 percent note due June 2022 climbed one basis point to 7.86 percent today, while the rupee was little changed at 53.785 per dollar. Indian bonds due in a decade pay 603 basis points more than similar-maturity U.S. Treasuries.
Indian bonds, along with those of Russia and Poland, will be the biggest gainers among emerging markets in 2013 as confidence in the rupee rises and cooling inflation allows the central bank to cut the highest interest rates among Asia’s biggest economies, Morgan Stanley predicted last month.
“Bond funds are expected to give better returns while gold loses its sheen in the current risk-on environment,” Rajesh Cheruvu, chief investment Officer for India at RBS Private Banking in Mumbai, said in an interview yesterday. “Recent policy strictures have reduced the attractiveness of the metal. They are trying to address the current-account deficit by bringing down gold imports. This is already attracting a decent amount of interest from foreign investors.”
Cheruvu prefers India’s longer-maturity bonds, predicting the 10-year yield to drop to 7.30 percent by year-end.
Overseas purchases of gold, which accounts for 80 percent of the nation’s current-account deficit, may decline 12 percent to 750 tons in the fiscal year starting April on higher taxes, according to Nomura Holdings Inc.
The gap in the broadest of trade will narrow to 4.3 percent of gross domestic product in the year through March 2014 from an estimated 4.9 percent this period, Japan’s biggest brokerage said in a Jan. 21 report. That would still be higher than the “sustainable level” of 2.5 percent, it said.
The deficit, which reached an unprecedented $22.3 billion in the three months to Sept. 30, fueled a slide in the rupee to a record low of 57.3275 per dollar on June 22. Gold imports are “a huge drain,” Finance Minister Palaniappan Chidambaram said Jan. 2. Purchases in the nine months through December were estimated at $38 billion, compared with $56.5 billion in 2011-2012, the finance ministry said in a statement on Jan. 21.
India also doubled a levy on gold ore, concentrate and so-called dore bars for refining to 4 percent, while an excise tax on refined gold will climb to 5 percent from 3 percent, the customs department said on its website this week.
‘Penchant for Gold’
“One of the reasons why households have a penchant for gold is that it has provided the best return among all instruments during a period of high inflation,‘‘ Sonal Varma and Aman Mohunta, economists at Nomura in Mumbai, wrote in the research report. ‘‘We think import duties will only lead to a reduction in gold imports through the official channel and result in a rise in imports through unofficial channels.’’
Bond risk in India has fallen every month since September, when Singh started unveiling the nation’s most aggressive policy changes in a decade aimed reviving the economy and improving public finances. The government reduced taxes on companies’ overseas debt, cut energy subsidies and allowed more foreign investment in industries including aviation and retailing, after Fitch Ratings and Standard & Poor’s last year warned the nation may lose its investment-grade rating.
The cost to insure State Bank of India’s debt, considered a proxy for the sovereign by some investors, for five years against non-payment using credit-default swaps fell 144 basis points in the second half of 2012 to 225, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
‘‘Higher taxes on gold will help the rupee at the margins,” Nick Verdi, a currency strategist at Barclays Plc in Singapore, said in an interview on Jan. 22. “This development joins the larger picture, where the Reserve Bank of India is ready to cut rates to boost growth. Global liquidity, which is quite flush, will boost inflows and help currencies like the rupee.”
The British bank predicts India’s monetary authority will lower the benchmark repurchase rate by 100 basis points over the next six months, starting with a 25 basis point cut to 7.75 percent at a Jan. 29 review. RBI Governor Duvvuri Subbarao said last month India’s monetary policy needs to shift focus toward supporting the economy from containing inflation.
Option traders are the most bullish on India’s currency in four years. One-year contracts conferring the right to sell the rupee against the dollar cost 140 basis points more than those to buy today, near the least since November 2008. The so-called risk reversal rate slid 270 basis points in the past year.
The move to curb gold imports “is part of the overall reform movement that has taken on positive momentum over the past few days and is supportive of the rupee,” economic growth and inflows, Paresh Nayar, head of money markets and currency at FirstRand Ltd. in Mumbai, said in an interview on Jan. 21.