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Business News/ Industry / Pimco lobbies India to ease bond-buying curbs as rupee to shine
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Pimco lobbies India to ease bond-buying curbs as rupee to shine

Pimco wants India to ease foreign-investment curbs so it can buy more of the nation's sovereign debt

Rupee government bonds handed investors the region’s best returns in the past year as slowing inflation allowed RBI to cut borrowing costs and the government acted to shore up its finances. Photo: Ramesh Pathania/MintPremium
Rupee government bonds handed investors the region’s best returns in the past year as slowing inflation allowed RBI to cut borrowing costs and the government acted to shore up its finances. Photo: Ramesh Pathania/Mint

Mumbai: Pacific Investment Management Co. (Pimco) wants India to ease foreign-investment curbs so it can buy more of the nation’s sovereign debt, its top pick in Asia after China.

“We’ve spoken to policy makers in May to increase that limit and as and when that happens, we are happy to buy more of local government bonds," said Luke Spajic, Singapore-based head of Asia portfolio management at Pimco, which manages $1.52 trillion of assets globally. “What makes India attractive is the prospect of a broad-based growth opportunity, which can lead to a lot of returns on the financial assets."

Regulators in India have capped overseas holdings of sovereign debt at $30 billion, seeking to limit the impact of capital outflows due to global events such as the Federal Reserve raising US interest rates. Rupee government bonds handed investors the region’s best returns in the past year as slowing inflation allowed Reserve Bank of India (RBI) governor Raghuram Rajan to cut borrowing costs and the government acted to shore up its finances.

“The main driver of growth will be structural reforms," Spajic said in an interview. “We find Indian bonds attractive due to the rate-cut view, Rajan’s inflation-targeting plan, potential reforms and very high-real rates."

Rajan waged a war against inflation since taking charge at the central bank in September 2013, raising interest rates and arresting a slide in the rupee, which sank to an unprecedented 68.845 a dollar in August that year on the Fed’s signal to end bond purchases. Earlier this year, he got Prime Minister Narendra Modi’s government to agree on an inflation target, one of the biggest reforms in the bank’s 80-year history.

Overweight rupee

Rupee debt returned 12.6% in the past 12 months, compared with 10.4% for Chinese notes and 6.3% for Indonesian securities, Bloomberg-compiled indexes show. Slowing inflation boosted the so-called real yield on 10-year government notes 130 basis points in the period to 2.41%.

The rupee has risen about 7% from its record low to 64.1350 a dollar and has delivered Asia’s best carry-trade return this year. Spajic said he is “overweight" the currency and expects it to outperform regional emerging-market peers in 2015.

“The rupee is a very high-yielding currency, which makes it very attractive," said Spajic, who has a doctorate in economics from the Cambridge University.

Modi’s promise

Modi’s promise of economic transformation prompted overseas investors to add to holdings of Indian corporate and government notes in 2015. Since taking power in May 2014, Modi has allowed higher foreign investment in some industries, spurred infrastructure spending and pledged to narrow the fiscal deficit to an eight-year low.

The International Monetary Fund (IMF) in April predicted India’s gross domestic product (GDP) will increase 7.5% in 2015, the most in five years, while China’s expansion will slow to 6.8% from 7.4% in 2014.

Aberdeen Asset Management Plc is overweight on bond markets in China and India as their currencies have lower volatility and are less susceptible to a capital flight from potential increases in US rates and other exogenous risks, Kenneth Akintewe, a senior investment manager in Singapore, said in an interview last week.

The rupee’s one-month implied volatility, a measure of expected moves in the exchange rate used to price options, plunged to a 2008-low of 4.77% on 21 July as Rajan lifted India’s currency reserves to a record.

Foreign institutional investors have almost exhausted their $30 billion limit for Indian government bond holdings, of which $5 billion is allocated to longer-term investors such as sovereign wealth funds. They have utilized about three quarters of the $51 billion corporate-debt cap.

Tweaking limits

Rajan said last month that the central bank and the markets regulator will discuss a plan to examine the sovereign-debt cap. Finance secretary Rajiv Mehrishi said in June that India may consider expressing the limit in rupees instead of dollars.

The $30 billion cap was set when “the rupee was much stronger, but at today’s rupee level the FII effective limit is $24 billion," Mehrishi told reporters in New Delhi on 26 June, without saying when any change might occur.

The 50% drop in Brent crude prices in the past year helped slow consumer-price gains to 5.40% in June from as high as 8.60% in January 2014, and narrowed the current-account deficit to a seven-year low in the year ended March.

Oil savings

“The decline in the deficit is significant," Spajic said. “Lower commodity prices, particularly oil, will significantly benefit a net-oil importing nation like India. Every $1/barrel drop or increase will roughly translate into $850 million to $900 million of surplus or deficit."

Rajan, who has cut the repurchase rate three times in 2015 to 7.25%, will leave the benchmark unchanged at the next review on Tuesday, according to the median estimate in a Bloomberg survey of economists. He has flagged deficient rains, oil prices and external volatility as inflation risks.

“We are overweight duration and do expect one more rate cut this year but the probability of this is more balanced," said Spajic. “Investors however should be aware of risks to inflation from bad monsoons and falling of currency." Bloomberg

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Published: 03 Aug 2015, 08:44 AM IST
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