By BLOOMBERG
Duvvuri Subbarao
Indian government bonds are rallying the most since 2008 as the biggest decline in inflation in four years gives central bank Governor Duvvuri Subbarao more room to lower interest rates.
The yield on 10-year debt slid 55 basis points since March 31 to 7.41 percent, headed for the largest quarterly slide since December 2008. Such rates fell 16 basis points in China to 3.43 percent and 14 in Brazil to 9.85 percent. Investors should buy Indian bonds to benefit as further monetary easing helps extend fixed-income gains, Deutsche Bank AG recommends.
Rupee-denominated sovereign notes are outperforming those in the four biggest emerging markets as Credit Suisse Group AG and Toronto-Dominion Bank predict the Reserve Bank of India will add to this year’s three reductions in its repurchase rate to 7.25 percent. The nation’s wholesale-price inflation rate fell 2.39 percentage points in two months, the most since March 2009, to 4.89 percent in April, official data show.
“The rally is expected to carry on and it’s a good time to buy more bonds,” Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd in Mumbai, said in a telephone interview on May 17. “With the recent drop in inflation, investors are factoring more interest-rate cuts.”
The 10-year sovereign yield declined 64 basis points, or 0.64 percentage point, this year as Subbarao lowered the repo rate by 75 basis points.
Beating BRICs
Indian debt returned 7.4 percent in 2013, beating a 1.9 percent gain on Chinese notes and 3.6 percent on Russian bonds, according to indexes compiled by JPMorgan Chase & Co. Brazilian securities lost 5.9 percent. The finance ministry issued new notes due in a decade at 7.16 percent at a May 17 auction.
Banks, the biggest buyers of government securities in India, boosted holdings by 814 billion rupees (RM45.32 billion) this year to 20.2 trillion rupees as of April 19, according to the most recent figures from the central bank. Global investors increased their ownership of rupee-denominated federal and company debt by US$4.9 billion since Dec 31 to an all-time high of US$37.8 billion on May 15, exchange data show.
“We are more convinced than ever that the central bank will find itself with more scope to ease rates,” analysts at Deutsche Bank, including Singapore-based Sameer Goel and Taimur Baig, wrote in a research note on May 10. “We believe the best way to position for this move is to be long cash bonds.”
Rate outlook
Slower inflation gives the RBI larger room for policy decisions, Chakravarthy Rangarajan, chairman of Prime Minister Manmohan Singh’s economic advisory council, said in a May 17 interview to Bloomberg TV India. Finance Minister Palaniappan Chidambaram has said he favors interest-rate cuts, which would help revive an economy that grew five percent in the year ended March 31, the least in a decade, according to official estimates.
On May 14, Subbarao said in Frankfurt the latest inflation data will be considered in a policy review due next month.
“Subbarao’s comments are important as he is acknowledging the drop in inflation,” Nagaraj Kulkarni, a strategist at Standard Chartered Plc in Singapore, said in an e-mailed response to questions on May 15.
“Foreign investors will be still interested in Indian debt.”
Kulkarni predicts the RBI will cut the repo rate by 25 basis points next month. Deutsche Bank sees the measure reduced to 6.5 percent in six months.
Real yield
Interest-rate swaps, derivative contracts used to guard against fluctuations in borrowing costs, signal investors are boosting bets for rate reductions in India. The cost to fix funding costs for a year using the contracts has fallen 12 basis points since May 3, when the RBI last eased policy, to a 28- month low of 7.05 percent on May 17. Similar rates increased seven basis points to 3.29 percent in China.
Inflation-adjusted bond returns in India reached the highest since 2009 this month after price increases slowed. The so-called real yield on 10-year government debt jumped 177 basis points this year to 251, according to data compiled by Bloomberg.
SBI Funds Management Pvt., a unit of the nation’s biggest lender, holds rupee sovereign bonds in “the belly of the curve,” betting cooling inflation will lead to more rate cuts, according to Mumbai-based fund manager Rajeev Radhakrishnan.
The slowdown in local price gains in the last two months exceeded economists’ estimates by the most since 2004, according to Citigroup Inc.’s Inflation Surprise Index for India.
“The unexpected fall of inflation may support further cuts,” Cristian Maggio, a senior emerging-markets strategist in London at Toronto-Dominion Bank, wrote in a May 14 report.
‘Relatively cautious’
Any further reduction in borrowing costs by the central bank would also depend on “developments on the current-account deficit front,” said Santosh Kamath, chief investment officer for fixed income at Franklin Templeton Asset Management (India) Pvt. The shortfall in the broadest measure of trade widened to a record US$32.6 billion in the final quarter of 2012, according to the latest figures from the central bank.
“We are relatively cautious compared to market expectations” on the prospect of further monetary easing in India, he said in an e-mailed response to questions on May 16.
India’s decision to ease rules on foreign ownership of local bonds also will spur gains in the market, according to Deutsche Bank. The government raised this year a limit on international holdings, cut a tax on such investments and simplified rules on such purchases.
The cost of insuring the debt of State Bank of India, considered a proxy for the sovereign, using five-year credit- default swaps fell 52 basis points since Dec 31 to 174, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
“Adding to our bullishness is the series of measures undertaken by the government to open up domestic bond markets to offshore investors,” the analysts at Deutsche Bank wrote in the May 10 report. “There’s scope for offshore” buyers to “increase holdings significantly,” they wrote.
– BLOOMBERG
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