Amundi Rues Bond Caps as Ashmore Says Modi Missing a Trick

  • Pimco says would be good if India chose to increase access
  • Returns on rupee notes top major Asian peers over five years

India’s restrictions on foreign investment in its debt are becoming a source of frustration as the world’s biggest money managers chase returns in Asia’s best sovereign-bond market.

The nation currently caps overseas ownership at 2.1 trillion rupees ($32 billion), and foreign portfolio investors are required to bid for quotas to expand their holdings. The limits have prevented the inclusion of local bonds in global indexes, such as those run by JPMorgan & Chase Co., encouraging funds to ignore the market.

Amundi Asset Management and Ashmore Group Plc say they will boost Indian holdings should the world’s fastest-growing major economy ease the restrictions, which policy makers say are meant to prevent hot money from destabilizing the rupee. Global funds hold around 4 percent of India’s total government debt, including that of states, according to HSBC Holdings Plc. That compares with 39 percent in Indonesia, 37 percent in Malaysia, 14 percent in Korea and 10 percent in Thailand.

“It’s difficult to invest in India, quotas and complications with respect to settlement mean that investors are barred from one of the largest bond markets in the world,” said Jan Dehn, head of research at London-based Ashmore, which oversees about $52 billion of emerging-market assets. “India is missing a trick. Ambition starts at home. It’s time that India extended its ambition from the realm of real economy to the realm of finance.”

Rupee sovereign bonds handed investors an annualized return of 10.3 percent over five years, the most among major emerging Asian markets. Even so, Indian corporate and government notes have seen an inflow of just $702 million over the last 12 months, compared with $17.9 billion for South Korea, $11.6 billion for Indonesia, $10.2 billion for Thailand and $6.72 billion for Malaysia.

Despite falling 103 basis points this year, the yield on benchmark 10-year Indian notes, at 6.73 percent, is the highest among major Asian markets after Indonesia. Investors are also drawn to Asia’s third-largest economy for its faster growth -- which the government forecasts at as much as 7.75 percent for the year through March 2017 -- and the potential for economic reforms. Prime Minister Narendra Modi’s administration has succeeded in pushing through some tough policy changes since coming to power in 2014.

Read: Global Funds Loving India Again as Modi Proves His Reform Mettle

What puts global funds off is the quota system, says Ashmore’s Dehn, which requires foreign portfolio investors to buy the rights to access sovereign securities through an auction every time their holdings exceed 90 percent of the investment limit. Further, rules require that foreigners invest in notes with a minimum residual maturity of three years. No index provider will include Indian notes until the nation removes the quotas, Dehn said.

“India is still excluded from global bond indexes and that’s a constraint for investors,” Luke Spajic, head of portfolio management for emerging Asia at Pacific Investment Management Co., which oversees about $1.5 trillion in assets globally, said in an interview last week. “It would be good if India chose to increase access.”

Answering such calls, India decided to raise the ceiling on overseas ownership of its bonds last year, saying the cap will be increased in phases to 5 percent of outstanding debt by March 2018. The next increase, effective Jan. 2, 2017, takes the ceiling to 2.2 trillion rupees.

Effective DateInvestment Limit
(billions of rupees)
Oct. 12, 20151,665
Jan. 1, 20161,795
April 4, 20161,900
July 5, 20162,000
Oct. 3, 20162,100
Jan. 2, 20172,200

Such market protectionism seems to have helped India in times of global turmoil. The nation’s bonds saw an outflow of just $72 million when China devalued its currency in August last year, compared with an exodus of $1.97 billion from Malaysia and $485.7 million from Indonesia. The rupee weakened 3.5 percent in August, before climbing 1.4 percent the following month. Losses deepened for Indonesia’s rupiah as it sank 3.7 percent in August and 4.1 percent in September. The Malaysian ringgit plunged 13 percent over the two months.

“We would increase our holdings of Indian bonds if the market is liberalized,” said Sergei Strigo, London-based head of emerging-market debt at Amundi Asset, which oversees over $1 trillion. “Should Indian local bonds become a part of the major indexes, there would be significant amount interest from passive index tracking funds and actively-managed funds.”

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