India Bond-Tourist Buying Limits Seen Misguided by TCWJeanette Rodrigues
TCW Group Inc. said curbing inflation and deficits is a better way to buoy demand for rupee bonds than limiting investor access, after Governor Raghuram Rajan sought to shield India from a global emerging-market selloff.
The Reserve Bank of India on Jan. 29 doubled to $10 billion the amount of government debt long-term investors such as sovereign wealth funds can buy, while reducing the quota for others by $5 billion to keep the overall cap on foreigners’ holdings at $30 billion. Global funds lowered their holdings by $1.4 billion since Jan. 21, anticipating further cuts in U.S. stimulus, paring inflows in 2014 to $1.8 billion.
“Trying to treat investors like cholesterol, separating the good from the bad, is easier said than done,” David Loevinger, a Los Angeles-based managing director at TCW, which oversees $132 billion globally, said in a Jan. 31 e-mail interview. “Countries that proactively attack imbalances and structural weaknesses will be rewarded.”
Asia’s third-largest economy needs to calibrate the opening of its debt market to attract stable investors rather than “bond tourists,” Rajan said in October, as policy makers remain wary of outflows such as those seen during the 1997-98 Asian crisis. The rupee, which slumped in the second and third quarter of 2013 before rebounding, is little changed since Sept. 30 even as Argentina’s peso plunged 28 percent and the Turkish lira dropped 10 percent.
“Longer-term lessons have been learned from the Asian crisis as well as last year’s sell-off, which for India started with debt-market outflows,” Vivek Rajpal, a strategist at Nomura Holdings Inc. in Singapore, said by telephone yesterday. “Policy makers know that hot money can come in and go out swiftly, especially if the nation’s balance sheet is not strong, and this move is a signal that stable funds are preferred.”
Indian policy makers have taken steps to rein in the highest consumer-price inflation in Asia as well as current-account and budget deficits that render it vulnerable to downturns in global risk appetite, according to Nomura.
The yield on the benchmark 10-year government bond fell 14 basis points, or 0.14 percentage point, this year to 8.68 percent. The rupee rose 0.1 percent to 62.445 per dollar today.
The shortfall in the current account, the broadest measure of trade, will be less than $50 billion in the fiscal year through March, compared with an unprecedented $88 billion in the previous period, Finance Minister Palaniappan Chidambaram said Jan. 30. The government raised tariffs on gold imports in the world’s biggest bullion-consuming nation to narrow the gap and RBI Governor Rajan lured $34 billion by offering discounted swaps for dollars raised by banks.
Chidambaram also reaffirmed on Jan. 23 his vow to rein in the budget deficit to within 4.8 percent of gross domestic product this fiscal year. Rajan unexpectedly raised borrowing costs on Jan. 28 and said consumer-price gains pose “the gravest threat” to the rupee’s value.
India is considering membership of Euroclear Bank SA’s bond settlement system, the world’s biggest, to woo investment, two government officials with direct knowledge of the matter said in November. Talks on including Indian notes in JPMorgan Chase & Co.’s emerging-market indexes have been deadlocked over the foreign investment caps, the officials added.
“We like the RBI’s greater focus on reining in consumer prices, which has been an impediment to investment and growth,” said TCW’s Loevinger, a former Deputy Assistant Secretary for Asia at the U.S. Treasury Department. “Making local Indian bonds Euroclear-able would also help boost demand from institutional investors.”
Long-term investors are unlikely to boost purchases of Indian debt until economic growth picks up, according to Standard Chartered Plc. Risks in the coming months include the possibility that national elections due by May will result in a weak and indecisive coalition government, the U.K. lender said.
Credit-default swaps insuring the debt of State Bank of India, a proxy for the sovereign, against non-payment for five years have climbed 24 basis points this year to 304, according to data provider CMA. India’s GDP will expand “a little below” 5 percent this fiscal year, the RBI forecasts, close to the previous period’s 4.5 percent pace that was the slowest in a decade.
“Steady inflows from long-term investors are desirable as they don’t add to volatility in local bond markets,” Nagaraj Kulkarni, a strategist at Standard Chartered Plc in Singapore, said in a telephone interview yesterday. “However, long-term investors are likely to wait for global risk sentiment to improve before reinvesting in emerging-market bonds.”
Such investors used just 12 percent of the investment limit available to them as of Feb. 3, while other funds have consumed 65 percent, exchange data show.
“The government would like to encourage long-term, real-money, high-quality investors,” Monish Mahurkar, Washington-based director at the International Finance Corp., the World Bank’s investment arm, said in a Jan. 31 e-mail interview. “This category of investors hasn’t been significantly active in Indian debt to date, with IFC being one of the few exceptions, so a higher limit per se may not immediately attract these investors, although, it does send a positive message to them.”