Share

Banks dump $15bn bonds in India tug-of-war with funds

Mumbai - India’s $750bn sovereign-debt market is caught in a tug of war between foreign investors and state-run banks, the biggest holders of the securities.

As lenders sold 952 billion rupees of sovereign bonds last quarter, overseas funds added more than 422 billion rupees to their holdings of the debt. The dichotomy is stemming from the potential for future gains that the two investor classes see in what has been emerging Asia’s best-performing market in the last three months.

For global investors like Franklin Templeton’s star bond-fund manager Michael Hasenstab, structural reforms by Prime Minister Narendra Modi, relatively high yields and a stable exchange rate make India a “sweet spot” among emerging markets.

At home, a central bank nearing the end of its monetary easing cycle and risks emanating from farm-loan waivers are stoking caution after a three-year bond run.

Settling away

“There are hardly any trading gains left in the market, much of the party seems to be over,’’ said Vijay Sharma, New Delhi-based executive vice-president for fixed income at PNB Gilts Ltd., a unit of India’s third-largest state lender by value. “We expect the Reserve Bank of India to deliver a 25-basis point rate cut in August and signal that more reductions won’t be coming.”

Local investors are also worried about a potential increase in debt supply, amid risks that Indian states lining up to rescue indebted farmers will fund a part of such bailouts by borrowing more from the bond market. With their higher yields, securities issued by regional governments could jeopardize the federal administration’s borrowing program.

While an RBI easing also risks narrowing the spread Indian notes offer over Treasuries, global money managers say the Asian nation’s real rates will still remain high in relative terms, and shouldn’t cause much harm to its carry-trade potential. Despite falling 231 basis points in the last three years, the nation’s 10-year bond yield is still the highest among major regional markets after Indonesia.

The yield, which fell two basis points on Tuesday to 6.55%, will drop to 6.53% by the end of this quarter, before rising to 6.60% by December 31, according to median estimates in surveys conducted by Bloomberg news.

Overseas investors are also lured by India’s political stability and its central bank’s continued efforts to rein in consumer-price inflation, which eased to a record low of 2.18% in May. Borrowing in dollars to purchase rupee assets has earned 7.5% so far this year, the highest carry returns in Asia, data compiled by Bloomberg show.

Settling away


India has drawn interest “due to its attractive carry, against the backdrop of a firm political mandate, a gradually improving macro story, and a stable currency,” said Wontae Kim, a Singapore-based research analyst at Western Asset Management, which oversaw $433bn at the end of March.

“Other markets may have higher absolute yields, but there aren’t many offering the kind of yields seen in India that also have the steady environment necessary to engender greater investor confidence.”

Foreign holdings of Indian debt - including sovereign, corporate bonds and notes issued by state governments - surged by 804 billion rupees in the three months ended June, the highest for any quarter in National Securities Depository’s data going back to 2011.

“Some public-sector banks had bought good amounts at higher yields, and there could be some profit booking happening,” said  C. Venkat Nageswar, the head of treasury at State Bank of India, the nation’s largest lender by assets.

Rupee sovereign bonds handed investors a return of 3.4% in the last three months, the highest in emerging Asia, according to indexes compiled by Bloomberg. The benchmark 10-year yield fell 17 basis points last quarter.

"Unprecedented" structural reforms by PM Modi will have long-lasting, positive implications for Indian markets, Franklin Templeton’s Hasenstab said in a video interview on the firm’s YouTube channel last week. Conditions are “very good for the bond market,” he said, adding that yields are likely to be stable or declining.

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.93
-0.0%
Rand - Pound
23.90
+0.0%
Rand - Euro
20.40
+0.1%
Rand - Aus dollar
12.32
+0.1%
Rand - Yen
0.13
+0.0%
Platinum
908.05
+1.2%
Palladium
1,014.94
+1.3%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders