MUMBAI: Indian debt usually offers sufficient cash-and-carry to overseas funds, and Mint Street late last week ensured that it stays that way.
The spread between one-year US dollar-based LIBOR (London Interbank Borrowing Rate) and one-year Indian Treasury bill is about 400 basis points – enough to induce foreign funds to borrow cheap at home, deploy in Mumbai debt, and carry back the cash profit. With the central bank easing curbs on foreign ownership of shorter-maturity Indian bonds, local debt should reverse its recent sliding trend.
This mechanism to borrow at lower costs and deploy in high-yielding emerging-market debt is called a carry trade in investing parlance. To be sure, the 400-bps spread doesn’t factor in hedging costs.
“The carry trade opportunity between offshore credit and domestic short-term markets is likely to become more prominent,” said Soumyajit Niyogi, Associate Director at India Ratings & Research. “A stable rupee and US treasury yields are two key factors helping such trading bets.”
Mint Street has stepped in after weekly sovereign bond auctions met with partially muted investor interest. The central bank has withdrawn a cap that had barred foreign portfolio investors (FPIs) from investing in Indian bonds of less than three-year maturity, a move expected to increase more overseas participation in the local bond market.
“If India receives short-term foreign money through such carry trade route, it will help alleviate the current account deficit,” Niyogi said.
Rising oil prices have increased India’s import bill as the country is one of the top oil importing nations. Higher imports have only helped widen the current account deficit
Foreign money inflows are beneficial to the exchange rate as they either check the rupee’s fall or aid the local unit’s gains against the dollar. A stronger or steady rupee helps oil importers that need not fork out extra costs to meet offshore liabilities.
“With the latest central bank move, overseas investors can now take advantage of the high interest-rate differential between short-term India and US papers,” said Anindya Banerjee, currency analyst at Kotak Securities. “A reversal of foreign fund inflows is also expected now in the coming weeks. This should check the rupee’s sharpNSE 0.00 % fall.”
The rupee lost about 2.5 per cent in April in which FPIs sold domestic bonds worth about Rs 7,500 crore.
“The minimum residual maturity requirement for Central Government securities and State Development Loans (SDLs) categories stands withdrawn, subject to the condition that investments in securities with residual maturity below 1 year by an FPI,” RBI said in a notification Friday. Moreover, they can even invest onefifth of their total investment in less than one-year residual maturity papers. FPIs are permitted to invest in corporate bonds with minimum residual maturity of above one year.
“There will be demand for shorter maturity gsecs and corporate bonds now,” said Ajay Manglunia, executive vice president at Edelweiss Finance, which deals with overseas portfolio investors. “With the opening of the FPI window, shorter maturity papers will now rally.”
Source: economictimes.indiatimes.com