Schroder Sees Rajan Steps Ending Record Fund Exit: India Credit

Reserve Bank of India Governor Raghuram Rajan’s twin-pronged action to curb inflation and support economic growth is regaining the confidence of global investors after an unprecedented capital flight.

Schroder Investment Management says investors will return to Asia’s highest-yielding investment-grade debt following $12 billion of outflows since May, after the RBI raised its main rate and simultaneously acted to ease cash supply yesterday. Mirae Asset Global Investments Group sees more optimism on Indian assets and Fischer Francis Trees & Watts is betting on gains in the rupee, saying Rajan has done a “wonderful” job.

India’s central bank is stepping up efforts to rein in consumer-price inflation that has stayed close to 10 percent even as the economy grows at near the slowest pace in a decade. The yield on the nation’s 10-year government bonds fell 12 basis points yesterday to 8.54 percent, the biggest decline in three weeks. A similar rate was 4.24 percent in China.

“We’ve already bought some in the last couple of months and we will continue to be positive and look for opportunities to buy,” Rajeev De Mello, who manages $10 billion as Singapore-based head of Asian fixed income at Schroder, said in an interview yesterday. “The policy decision is consistent with the focus they’ve been placing on the CPI and this will continue to give more credibility to the RBI, so I take it as good news. The yield level is high and that too will draw demand.”

Rajan’s Measures

Rajan, a former International Monetary Fund chief economist who took charge of the RBI last month, increased the repurchase rate by 25 basis points, or 0.25 percentage point, yesterday to 7.75 percent, the second increase in two months. Simultaneously, he cut the marginal standing facility, or MSF, and bank rates by 25 basis points to 8.75 percent each to make cash more easily available in the financial system.

The RBI will lift the repo rate to 8.5 percent by March to contain price pressures, according to Goldman Sachs Group Inc. India’s consumer-price inflation quickened to 9.8 percent in September, compared with 5.9 percent in Brazil, 3.1 percent in China and 6.1 percent in Russia.

Ten-year sovereign bond yields have retreated 70 basis points from a 2008 high of 9.24 percent in August as the RBI scaled back emergency cash-tightening measures introduced in July to stem a slide in the rupee. The central bank has pared the MSF and bank rates by 1.5 percentage points each in the past six weeks as the rupee rebounded to 61.465 per dollar from a record low of 68.845 on Aug. 28.

‘Wonderful Selection’

Rajan is “a wonderful selection for the central bank,” John Morton, Boston-based head of emerging markets at Fischer Francis, a unit of BNP Paribas Investment Partners that manages about $54 billion, said in an Oct. 28 interview in Hong Kong. Policy makers in India “know what needs to be done and the question is whether the political system is capable of delivering it. We do see the recovery of the rupee.”

Fischer Francis will wait to see whether the government opens wider to foreign direct investment before making longer-term investments in the Indian bond market, he added.

Three-month interbank borrowing rates have fallen to 9.22 percent from a five-year high of 11.59 percent in September as the RBI acted to boost funding availability, data from the National Stock Exchange of India Ltd. show. Rates on similar-maturity commercial paper dropped to 9.21 percent from a peak of 12.69 percent in August, according to data compiled by Bloomberg. India’s economy grew 5 percent in the year ended March 31, the least since 2002-2003, government data show.

Rajan’s steps to ease cash supply and the rupee’s rebound will boost confidence in India’s bond market, bolstering demand for fixed-income notes, Barclays Plc said in an Oct. 10 report.

‘Vulnerable Environment’

International holdings of rupee securities may not see an immediate rebound amid India’s economic slowdown and as the prospect of the U.S. cutting monetary stimulus has damped appetite for emerging-market assets, according to Raiffeisen Capital Management.

“It will be a bit difficult to hold on with Indian assets considering the vulnerable domestic macro-economic environment and low risk appetite for emerging markets,” Juergen Maier, fund manager at Raiffeisen Capital Management in Vienna, who oversees about $1.1 billion in emerging-market assets, said in an interview yesterday. “We believe there are no reasons for flows to the emerging markets to accelerate in the short term as we don’t anticipate too many opportunities.”

Yield Curve

A record inversion in India’s bond yield curve is reversing as short-term rates drop faster after the central bank’s move to ease funding curbs. Ten-year government notes now pay 21 basis points more than two-year debt, compared with an unprecedented minus 272 basis points in July. A steep curve is often seen as a sign of confidence an economy will grow and generate inflation.

The reversal of the yield-curve inversion signals local markets’ are returning to normalcy after last quarter’s rupee tumble forced policy makers to adopt emergency measures to restore stability, Maneesh Dangi, Mumbai-based co-chief investment officer at Birla Sun Life Asset Management Co., said in an interview last week.

Sales of Indian bonds by foreigners will decline as Rajan’s policies buoy investor sentiment, according to Mirae Asset, which managed $56.25 billion worldwide as of July 31.

“The new governor brought to markets some optimism that India could change for the better,” Kim Jin Ha, the Seoul-based head of global fixed income at Mirae Asset, said in an interview yesterday. “The rupee has had a relief rally. The additional selling pressure from foreign investors won’t be large.”

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