Pictet Bullish as Rajan Inflation War Wins Inflows: India Credit

Pictet Asset Management Ltd. and HSBC Holdings Plc are bullish on Indian bonds as the central bank ensures inflation is tamed before cutting interest rates.

Overseas investors have been buyers of local debt for seven straight months, the longest run of inflows in four years, taking their holdings to a record $49.2 billion as of Nov. 26. Borrowing in dollars to invest in rupees has returned 7.6 percent this year, the highest after Argentina’s peso among 23 emerging-markets carry trades tracked by Bloomberg.

Reserve Bank of India Governor Raghuram Rajan is forecast to leave one of Asia’s highest benchmark rates unchanged tomorrow, and signal possible easing next year as cheaper oil helps keep inflation below his January 2016 target. Global funds have flocked to buy Indian assets after he stabilized the rupee by raising borrowing costs, gold-import curbs narrowed the current-account deficit and the new government cut red tape.

“India is a strong conviction trade for us in the medium term,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet, which oversees $25 billion of emerging-market debt, said by phone on Nov. 28. “We are overweight India bonds and will likely stay overweight for quite some time.”

Policy Outlook

Rajan will keep the repurchase rate at 8 percent tomorrow, according to 44 of 48 analysts surveyed by Bloomberg. Four forecast a cut to 7.75 percent. Economists at Goldman Sachs Group Inc., Citigroup Inc. and Barclays Plc predict it will be lowered to 7.50 percent in the first six months of 2015. Growth in Asia’s third-largest economy slowed for the first time in three quarters, to 5.3 percent in the three months ended Sept. 30, official data showed Nov. 28.

Government bonds rallied this quarter, with the 10-year yield dropping 51 basis points to 8.05 percent, as a 39 percent decline in Brent crude prices from June 30 cooled inflation in the nation that imports about 80 percent of its oil. The notes have returned 14.4 percent this year, the best in Asia.

HSBC counts the securities among its top Asian trades in 2015 and predicts the yield will reach 7 percent by the end of next year and as low as 6 percent by end-2016, Andre de Silva, the bank’s Hong Kong based head of Asia-Pacific rates research, wrote in a Nov. 20 report.

‘Top Bonds’

India’s sovereign notes “rank top among Asian bonds in terms of carry, capital and to a certain degree, currency gains,” de Silva wrote. “Lower crude prices provide another reason to be overweight government securities as it allows the government to reduce subsidies while taming the current-account deficit and inflation.”

The rupee has surged about 10 percent from an all-time low in August 2013 after Rajan raised rates three times in the September to January period. The currency has weakened 0.6 percent this year, the smallest decline in Asia after Thailand’s baht. It fell 0.2 percent to 62.1550 per dollar today.

India’s foreign reserves rose to $314.9 billion as of Nov. 21, from $275 billion in August last year, after reaching a near record $321 billion in July. Lower oil prices will help reduce the current-account gap to 1.5 percent of gross domestic product in the year ending March 2015, compared with 1.7 percent in the previous year, according to HSBC.

Investor Confidence

Foreigners poured a net $40.3 billion into Indian bonds and stocks this year as Rajan’s measures boosted investor confidence and Prime Minister Narendra Modi pledged to revive the economy from the worst slowdown in a decade by easing rules on foreign investment and building roads, ports and railways.

“If they continue on what they are doing at this point in terms of policy execution, I won’t be too surprised to see a 50 to 55 range for the currency in the next 12 months,” Adeline Ng, the Singapore-based head of Asian fixed income at BNP Paribas Investment Partners, which oversees $622 billion, said in a Nov. 18 interview in Hong Kong.

While inflows have surged, further buying will depend on whether the central bank raises the current cap on sovereign debt ownership by foreign investors of $25 billion, according to Elara Securities Pvt. Almost 98 percent of the limit had been used as of Nov. 27, exchange data show.

‘Policy Makers Skeptical’

“The policy makers are skeptical about allowing too much short-term money very quickly after the last year’s experience, when the rupee tumbled on outflows,” Ashish Kumar, an economist at Elara in Mumbai, said by phone on Nov. 28. “The preference is for a long-term flows by way of foreign-direct investments and equities, and then debt.”

Consumer prices rose 5.52 percent in October from a year earlier, the least since the index was created in early 2012, and lower than Rajan’s January 2016 target of 6 percent. India’s 10-year sovereign bonds now pay an inflation-adjusted yield of 253 basis points, or 2.53 percentage points, the highest since at least Jan. 2012.

“We continue to like Indian bonds based on the determination of the RBI to bring down inflation,” Rajeev De Mello, who manages about $10 billion as the head of Asian fixed income at Schroder Investment Management Ltd. in Singapore, said in a Nov. 28 e-mail interview. “A mild depreciation of the rupee will not offset the significant carry earned by investing in Indian bonds.”

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