Rupee Favored as Rajan Making Hay While Fed Delays: India Credit

Barclays Plc and SEB AB favor Indian assets over Indonesian, as policy makers use a delay in tapering of U.S. stimulus to repair the nation’s finances.

The extra cost of protecting bonds of State Bank of India, a proxy for the sovereign, over those of Indonesia’s government will drop from a one-year high as the shortfall in India’s broadest measure of trade narrows, Barclays predicts. The rupee, emerging Asia’s worst performer after the rupiah in 2013, gained in the past three months and will have breathing room until the Federal Reserve starts paring its asset purchases in March, according to the U.K. lender.

Pacific Investment Management Co., which runs the world’s biggest bond fund, said Reserve Bank of India Governor Raghuram Rajan made “hay while the sun shines” by buying dollars as the rupee rallied. Foreign reserves increased by $7 billion to $254 billion at the end of October from August. Indonesia’s buffer rose by $4 billion to $97 billion in the same period.

“India has steadily been working to prevent a repeat of August,” Sean Yokota, the Singapore-based head of Asia strategy at SEB, Sweden’s fourth-biggest bank by market value, said in a Nov. 18 e-mail interview. “Upside risk to inflation is lower in India” relative to Indonesia, according to Yokota.

Rajan has raised the RBI’s benchmark repurchase rate twice since taking over as RBI governor at the start of September and pledged to curb inflation. India’s consumer prices climbed 10.1 percent from a year earlier in October, compared with an 8.32 percent increase in Indonesia, official data show.

Deficits, Currencies

The spread between five-year credit default swaps of State Bank of India and Indonesian sovereign debt touched 122 basis points on Nov. 18, the highest since November 2012, according to data provider CMA. Barclays last week cut its forecast for India’s current-account deficit for the year through March 2014 by about $20 billion to $48.2 billion and raised its prediction for Indonesia’s 2013 shortfall by $2 billion to $33.5 billion.

The rupee has weakened 12.5 percent to 62.8575 per dollar this year, while the rupiah has slumped 17.7 percent to 11,713, data compiled by Bloomberg show. India’s currency has rebounded 9.5 percent from an unprecedented low reached Aug. 28, while its Indonesian counterpart has slipped 6.6 percent in that period.

SEB recommends investors buy India’s currency as Rajan will likely increase the repurchase rate by 50 basis points to 8.25 percent in the next three to six months as the Fed prepares to cut its record bond buying. Barclays says the RBI’s offer of discounted swaps for dollars raised by banks, scheduled to end Nov. 30, will help fund about 60 percent of the nation’s current-account shortfall.

Barclays Strategy

“We believe India’s current-account deficit is adjusting at a faster pace than expected by markets,” Barclays analysts, including Siddhartha Sanyal in Mumbai, wrote in a Nov. 14 report. They recommend buying Export-Import Bank of India’s bonds due in 2023 and selling Indonesia’s 10-year debt.

Both nations run current-account and fiscal deficits, are tightening monetary policy to rein in price pressures amid slowing growth, and face political risks before national elections due next year. What differentiates India is that most of its debt is held by locals, allowing for greater policy flexibility, according to Spiro Sovereign Strategy.

Global funds held 1.59 percent of India’s outstanding local-currency sovereign debt as of the end of June, compared with 31.9 percent of Indonesia’s, official data show

‘Rock Solid’

The composition of India’s investor base helped attract Union Investment Privatfonds GmbH to its debt, while staying underweight on Indonesia. Sergey Dergachev, senior portfolio manager at the Frankfurt-based company, who bought dollar bonds of Reliance Industries Ltd. and HDFC Bank Ltd., said holding patterns matter in times of market turbulence.

“The best Indian credits like Reliance or State Bank are rock solid, and have the ammunition to withstand market turmoil,” Dergachev, who helps oversee about $9 billion of assets at Union Investment, said in a Nov. 18 e-mail interview. “When U.S. tapering talk resumes, I will expect Indonesia to underperform significantly” versus India, he wrote.

Even as investors react to risks in India and Indonesia, the nations won’t be “avoided entirely” because they offer relatively higher sovereign yields by way of compensation, Ramin Toloui, Singapore-based head of emerging markets at Pimco, said in a Nov. 14 interview.

‘Pick Your Poison’

Ten-year government bonds yield 8.39 percent in Indonesia and 9.10 percent in India, compared with with 3.68 percent in South Korea and 4 percent in Malaysia.

Indonesian yields are still attractive and will continue to attract inflows, Priyo Santoso, who helps manage about $1.7 billion of assets as chief investment officer at PT Mandiri Manajemen Investasi in Jakarta, said in a Nov. 19 interview.

“There are significant differences between India and Indonesia but worrying parallels as well,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in a Nov. 19 telephone interview. “For investors, it’s a case of ‘pick your poison.’”

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