SINGAPORE, Nov 28 (IFR) - India is proving to be immune from the heavy
selling in global emerging-market debt, as Prime Minister Narendra Modi's
clampdown on undeclared cash has sparked expectations of a rate cut and pushed
issuers to take advantage of low yields.
Indian Railways Finance Corporation, NTPC, Vedanta Resources, Exim India and
Axis Bank all rushed to print rupee notes last week to access cheaper funding.
"The debt market is very compelling," said Killol Pandya, head of fixed
income at Peerless Funds Management. "Issuers that were otherwise going to banks
are approaching the bond market as banks are yet to cut lending rates."
India's 10-year government benchmark has fallen to 6.19 percent, below the
central bank's repo rate of 6.25 percent, on expectations of a 25bp-50bp rate
cut at the December 6-7 monetary policy committee meeting. The two have
converged only three times in the last decade, according to banking analysts.
Corporate bonds have also received a boost as a result of the government's
cancellation of 500 rupee and 1,000 rupee banknotes on November 7.
Banks received record inflows of 5.4 trillion rupees ($79 billion) since the
government announced its clampdown on black money, according to RBI data
released last Monday. Even after withdrawals of Rs1trn, banks are still flush
with liquidity and are finding new avenues to deploy the cash.
"Banks are buying corporate bonds because spreads between the G-sec and AAA
corporate bonds have widened," said NS Venkatesh, executive director and head of
treasury at Lakshmi Vilas Bank.
"Public-sector banks alone have bought corporate bonds worth Rs70bn this
week," said Venkatesh.
India's 10-year AAA corporate benchmark was last week quoted at a yield of
6.96 percent, 77bp above government bonds of the same maturity.
"There is so much liquidity and credit offtake is muted. Banks are getting a
yield pick-up by investing in quasi-sovereign bonds," Venkatesh said. MORE
EASING Expectations of a rate cut have risen as India's GDP is expected to take
a near-term hit as cash-dependent businesses struggle to cope up with a cash
shortage.
"From an investment perspective, the demonetisation drive is likely to have a
disinflationary impact, given how dependent on cash the Indian economy is for
internal trade," said Manu George, senior investment director for Asian fixed
income at Schroders.
Some brokerages like Ambit have slashed their GDP growth forecasts by 330bp
to 3.5 percent from 6.8 percent for the current fiscal year ending in March.
Despite hitting short-term growth, the cash purge has given some foreign
investors more confidence in rupee bonds.
"We are constructive on India, despite the rally that we have seen because it
is a domestic story," said Leong Lin Jing, investment manager at Aberdeen Asset
Management.
The correlation of the Indian bond market to the rest of the region, and the
world, is relatively low.
Rupee bonds have rallied, despite global volatility after Donald Trump's
shock election win as foreign investors hold only 5% of Indian domestic bonds,
compared with other emerging markets like Indonesia, where 40 percent of local
government bonds are in foreign hands.
"In our Aberdeen India bond fund, we are seeing inflows given the country's
increasingly positive structural story, while its bond market remains one of the
most uncorrelated and idiosyncratic in the world," said Aberdeen's Leong.
"Corruption is likely to come down and there will be less bribery, including
political donations."
Domestic mutual fund investors are rotating their money into bonds from
equities, which have seen selling pressure in the past two weeks.
"We are seeing inflows into duration funds (income funds, long-term corporate
and government bond funds) from retail and high-net-worth investors," said
Pandya at Peerless Mutual.
However, some fund managers are cautious and feel that India is not
completely immune to foreign investors selling emerging markets.
"It is hard to see it totally unaffected. India is caught in a bit of a tug
of war between the domestic versus global story," said Ashley Perrott, head of
pan-Asia fixed income at UBS Asset Management.
"There is a consensus forming that RBI will cut rates. Whether they can go
ahead given what is happening with the rupee is a question."
The rupee has fallen 2.6 percent against the dollar since November 1, and
foreign investors have been net sellers of $193 million of domestic bonds and
equities since the beginning of November, according to data from the National
Securities Depository. MASALA MAYHEM The fall in domestic yields has weighed on
plans for offshore rupee, or Masala, bonds.
"There have been five mandates for Masala issues that we got which have been
postponed," said an investment banker from a foreign bank.
With emerging market currencies still under pressure, there is not much
interest for offshore rupee bonds. Some issuers have postponed Masala plans
because it is cheaper to raise money onshore.
Other factors have also hurt demand. Some short-term investors that bought
Masala bonds are unhappy as they are finding it difficult to sell lots of $1
million because there is no liquidity, even though they bought larger lots from
the primary market, said Aberdeen's Leong.
The last few issues of Masala bonds had met muted responses and arrangers
even had to buy some bonds themselves, said the DCM banker.
"Most Masala bonds were subscribed by arrangers and investors to redistribute
to private-banking clients. With FCNR (foreign currency non-resident) deposit
maturities now over, there is no demand from this segment either," he said.
(Reporting by Krishna Merchant; editing by Daniel Stanton and Steve Garton)
Source: http://in.reuters.com/