Billion-Dollar Outflow Seen as Blip by India Bulls Chasing Yieldby
India remains ‘sweet spot’ in emerging markets: Western Asset
Longest run of foreign outflows in three years linked to Fed
Western Asset Management Co. and HSBC Holdings Plc say the longest stretch of foreign fund outflows in three years shouldn’t be taken as a sign of waning appetite for Indian bonds.
The two firms are bullish on rupee-denominated debt, with HSBC saying the withdrawals, which resulted from a broader emerging-market selloff, won’t be sustained given the global hunt for yield amid near-zero interest rates in developed nations. Benchmark 10-year sovereign notes in India pay 7.46 percent, the highest among major Asian markets after Indonesia. That compares with 1.85 percent for Treasuries and a negative yield in Japan.
“When investors are hungry for yields, India remains a sweet spot in the emerging-market bond universe,” said Desmond Soon, Singapore-based head of investment management in Asia outside of Japan at Western Asset, which manages about $450 billion. “We are overweight Indian bonds.”
Foreign holdings of Indian government and corporate debt fell by 67 billion rupees ($1 billion) in the nine days through May 26, the longest stretch of declines since July 2013, before rising 12.2 billion rupees on Friday, National Securities Depository Ltd. show. The hoard has dropped by 52.3 billion rupees in May, after a two-month increase, as minutes of the Federal Reserve’s April meeting signaled most officials thought a June rate hike would be appropriate if the U.S economy continues to improve.
In remarks Friday at Harvard University, Fed Chair Janet Yellen threw her support behind the growing consensus in favor of another rate increase soon, even while steering clear of specifying the timing of such a move. Futures show odds for a rise in June stand at 30 percent, while those for July are at 54 percent.
India’s 10-year sovereign bonds are headed for their first monthly decline since January, with the yield rising two basis points in May to 7.46 percent. That on similar-maturity corporate notes has climbed five basis points to 8.31 percent, halting a two-month slide. The nation on May 17 failed to meet its goal at an auction of sovereign debt-investment quotas for overseas investors for the first time in three years.
“The recent selling is not something specific to India and we don’t believe that such outflows are likely to be sustained,” said Himanshu Malik, a strategist at HSBC in Hong Kong. “We are still likely to see foreign inflows into high-yielding emerging markets, in particular those which have better economic fundamentals. Indonesia and India bond markets both fall in this category.”
The rupee weakened for the first time in four days on Monday as developing-nation currencies retreated following Yellen’s comments. The Indian currency fell 0.5 percent to 67.3375 a dollar in Mumbai, set for its biggest decline since May 19, according to prices from local banks compiled by Bloomberg. The currency has retreated 1.5 percent this month and is Asia’s worst performer in 2016 with a 1.8 percent loss.
India boasts the fastest growth rate among the world’s major economies, expanding 7.6 percent in the year to March 2016, and has had success in taming inflation, improving public finances and curbing currency volatility. Economists forecast the benchmark repurchase rate, already at a five-year low, will be reduced once more this year, amid predictions for above normal monsoon rainfall for the first time since 2013.
Rupee sovereign notes handed investors a return of 5 percent in the past three months, compared with an average 3.1 percent gain in Asian local-currency securities, indexes compiled by Bloomberg show. The nation’s 10-year debt pays 561 basis points more than similar-maturity Treasuries, despite having declined 30 basis points in 2016.
A gauge of the rupee’s one-month implied volatility has fallen to 6.17 percent from as high as 9.74 percent in August 2015 as Reserve Bank of India Governor Raghuram Rajan lifted foreign-exchange reserves to all-time highs.
“High yields and the stability of the rupee are what makes Indian bonds appealing to investors,” said Soon of Western Asset. “And whatever gyrations we see on bond outflows, could be just a short-term blip. India is doing very well if one looks at the key economic parameters.”