Rajan Rate Cuts Nearing End Spur Flight From Indian Gilt Funds

  • Investors pull 20 billion rupees in three months through April
  • Hard to be bullish, some more outflows likely: Peerless

Indian mutual funds targeting government debt are losing appeal on bets the central bank has little ammunition left after the most aggressive monetary easing since 2009.

So-called gilt plans saw a third month of outflows in April, the longest stretch in almost two years, Association of Mutual Funds in India data show. Reserve Bank of India Governor Raghuram Rajan will cut the benchmark repurchase rate just once more this year, to 6.25 percent, and hold it there until the end of 2017, according to the median estimate in a Bloomberg survey.

A three-month rally in government bonds has stalled as inflation accelerated at a faster-than-estimated pace in April amid higher food and oil prices. Investors are shifting focus to the June-September monsoon rains, forecast to be above-normal this year after two successive droughts. The seasonal showers could boost farm output, raise incomes and spur demand, limiting the extent to which economic growth relies on central bank stimulus.

“When you’ve seen 150 basis points of rate cuts come in, it’s not really possible to be bullish in a big way,” said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds Management Co., which oversees 9.9 billion rupees ($148 million). “Some more outflows may happen at a slower pace as investors probably are shifting to the products or funds that have a more expanded profile.”

Investors pulled 3.7 billion rupees from gilt funds in April, taking outflows in the last three months to 20.2 billion rupees, AMFI data show. The broader category of fixed-income funds attracted 314.5 billion rupees last month, while equity plans took in 40.4 billion rupees.

Rajan wants to limit price gains to 5 percent by March 2017 as he looks to monsoon rains to determine whether he has room to add to five interest-rate cuts since early 2015. He cut the repurchase rate to a five-year low of 6.50 percent on April 5 and took steps to improve banking-system liquidity.

Consumer prices rose 5.39 percent in April from a year ago, a report showed on Thursday, exceeding the median 5.05 percent forecast in a Bloomberg survey and rebounding from March’s six-month low. The consumer food price index climbed 6.32 percent, after a 5.21 gain in March, led by a 34 percent surge in prices of pulses.

The monsoon, which accounts for more than 70 percent of India’s annual rainfall, will arrive a week later this year, prolonging a drinking water shortage and delaying planting of crops from rice to cotton and sugar cane, the state weather department said over the weekend.

‘More Compulsive’

Asian policy makers are also taking into account uncertainty over the U.S. Federal Reserve’s tightening and the impact of China’s slowdown. The Bank of Korea Friday left its key rate unchanged for an 11th consecutive month as a newly composed board opted to monitor economic data and the progress of corporate restructuring before acting. Indonesia paused its easing last month.

The yield on Indian sovereign bonds due January 2026, the current 10-year benchmark, rose one basis point to 7.46 percent on Monday, set for its highest close since April 27. It climbed the most in three weeks on Friday, following the higher-than-estimated inflation reading. The yield has risen two basis point in May after sliding 20 basis points in the previous three months.

IDFC Asset Management Co. is bullish on notes with maturities ranging between two and seven years, which it sees benefiting more from the central bank’s cash infusions.

“It’s reasonable to assume that majority of the duration rally is over as the RBI’s rate cut cycle is approaching an end,” said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset that oversees about 523 billion rupees of assets, referring to bonds due in 10 years or later. “The opportunity is more compulsive at the shorter end.”

‘Less Favorable’

Local investors put in a net 7.6 billion rupees into gilt funds in the financial year ended March 2016, about a 10th of the inflows worth 77.1 billion rupees seen in the previous 12 months, AMFI data show. Fixed-income funds took in 147.4 billion rupees, triple the previous period.

“Investors in gilt funds benefit when there are expectations of a sharp decline in interest rates, which isn’t the case now,” said R.K. Gupta, New Delhi-based managing director at Taurus Asset Management Co., which oversees 39.5 billion rupees. “That’s the reason these funds are becoming less favorable.”

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