Fastest-Growing India Fund Says RBI Dove Needed to Sustain Rally

  • Global holdings of rupee-denominated bonds have jumped in July
  • Ten-year yield may drop to 7 percent by March: Radhakrishnan

Among the first things Rajeev Radhakrishnan does these days after getting up is to scan the news to see if India has picked a new central bank governor.

“In the very near term, since the whole market is punting on a dovish Governor, that is the most important thing that will give a new direction to the bond markets,’’ Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management Pvt., said in a phone interview. “The noise around the new governor’s appointment has created quite a flutter recently and the market is fairly justified in rallying.”

Indian sovereign bonds have climbed the most since September this month amid speculation that a successor to Reserve Bank of India Governor Raghuram Rajan will lean toward looser monetary policy as strong monsoon rains improve the inflation outlook for Asia’s third-largest economy. Foreign holdings of rupee debt are rising at the fastest pace in 17 months as the highest yields among major regional markets lure global funds.

SBI Funds is India’s fifth-biggest money manager with 1.2 trillion rupees ($17.9 billion) of assets as of June 30. Its market share rose to 8.33 percent from 6.83 percent at the end of June last year, the fastest increase in the industry, data compiled by Bloomberg show. The SBI Dynamic Bond Fund has returned 7.5 percent so far this year, beating 94 percent of its peers, data compiled by Bloomberg show.

The yield on benchmark 10-year debt has dropped 18 basis points in July to 7.27 percent in Mumbai on Wednesday, helped also by the RBI’s cash injections into the financial system. That matches its close on Friday, which was the lowest since June 2013.

The yield slipped 10 basis points over July 12-13, the biggest two-day drop since March 1, after a report that Arvind Panagariya, vice chairman of a policy research group established by Prime Minister Narendra Modi, was the top contender for the RBI job. Panagariya has in the past called for lower rates and a reworking of the inflation framework.

“Right now, we are fairly valued and an incremental rally in the very near term will happen if there is a dovish governor, which can potentially open up space for rate cuts,” said Radhakrishnan. “If you have more rate cuts and ample liquidity supported by soft global yields, India’s 10-year yield may drop to 7 percent this fiscal year.”

To read about India’s latest inflation numbers, click here.

Despite falling 49 basis points this year, India’s 10-year yields are the highest among major Asian markets, and pay about 571 basis points more than similar-maturity Treasuries.

That’s attracting global funds, who were net buyers of rupee-denominated government and corporate notes for nine straight days through July 19, the longest stretch since February 2015. They’d pared holdings in the last two months as India’s inflation accelerated and emerging markets suffered a blow from the U.K.’s June 23 vote to leave the European Union.

India’s rupee has gained 0.5 percent this month to 67.1975 per dollar, halting a three-month decline. A gauge of its one-month implied volatility, used to price options, has dropped to 5.56 percent from 7.93 percent on June 24, data compiled by Bloomberg show.

“We are in a new normal, where global bond yields are likely to remain soft,” said Radhakrishnan. “The rupee has been fairly stable and from that perspective, there’s a lot of yield advantage to be taken by foreign investors.’’

Rajan, whose three-year term ends early September, has kept the benchmark repurchase rate unchanged since reducing it to a five-year low of 6.50 percent in April. Other names doing the rounds for his post include, finance ministry chief economic adviser Arvind Subramanian, RBI deputy governor for monetary policy Urjit Patel, who’s spearheaded the inflation-targeting framework with Rajan, and a former deputy governor Subir Gokarn.

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