Indian Bonds Set for Worst Month Since 2013

Bloomberg -June looks set to be the worst month for Indian bonds since 2013, when Governor Raghuram Rajan took charge at the central bank. Aberdeen Asset Management Asia Ltd. hasn’t lost faith.
Fears that inadequate rains will stoke inflation, coupled with the deadlock over Greece, have caused the benchmark 10-year sovereign yield to climb 26 basis points to 7.90 percent. That for similar-maturity AAA rated company debt has risen 12 basis points this month to 8.57 percent. Swings in government notes have widened to a 10-month high as investors also brace for an increase in U.S. interest rates later this year, which could see global funds pulling money out of emerging markets.

Aberdeen is keeping confidence in Rajan’s inflation-fighting credibility as he slowed gains in consumer prices to about 5 percent from more than 8 percent a year ago. He has also cut interest rates three times this year to spur Asia’s third-largest economy as souring bank loans, stalled projects and political opponents stall Prime Minister Narendra Modi’s efforts to boost growth.

“To us the potential of India is Modi plus Rajan,” said Donald Amstad, Singapore-based business development director at Aberdeen Asset. “If you put a gun to my head and said you have to buy one bond market and hold it unhedged in dollars for the next ten years, it’s India.”

Aberdeen Asset Management Plc oversees $491 billion of assets globally. Amstad’s optimism is shared by Vivek Rajpal from Nomura Holdings Inc., who predicts local government notes will rally in the second half given the steady decline in inflation and “attractive valuations” after the recent losses.
‘Very Constructive’
India Meteorological Department last week tempered optimism spurred by a wetter-than-normal June, predicting that overall precipitation in the June-September monsoon season will still be deficient due to the strengthening of the El Nino phenomenon that brings dry weather conditions. That renewed concern that potential damage to crops will boost food costs.

This month’s increase in the 10-year sovereign yield is the biggest since August 2013. The 50-day historical volatility for the securities has jumped to 9.86 percent, the highest since last August, and from 8.53 percent at the end of May. The advance in the corporate bond yield is the steepest since December 2013.
“Despite the recent volatility, I have a very constructive view on India,” said Rajpal, a rates strategist at Nomura in Singapore. “Ten-year sovereign yields can drop by about 40 basis points by the end of 2015 as Rajan’s focus on inflation and the government’s fiscal-consolidation efforts will support bonds over the medium term.”

Stable Outlook

Indian sovereign notes have handed investors Asia’s best returns in the past six months, indexes compiled by Bloomberg show. Rupee-denominated debt earned 3.6 percent, compared with 2.7 percent for Indonesian securities and 2.6 percent for Chinese notes.

Global funds have also been lured to India as Prime Minister Modi, who came to power in May 2014, cut red tape and took steps to improve public finances. He also raised spending on infrastructure and allowed higher foreign investment in industries such as defense.
Faster growth, slowing inflation and a narrower budget deficit prompted Moody’s Investors Service to lift India’s rating outlook to positive from stable in April this year.

Building Credibility

Rajan, a former International Monetary Fund chief economist, has propelled the nation’s foreign-exchange reserves to a record $355 billion to shield the rupee from fund outflows in case of any external shocks. Options signal a narrowing of currency swings, reducing overseas investors’ risk.
Three-month implied volatility in the rupee slumped to this year’s low of 6.54 percent on June 25, signaling a smaller potential for losses. Traders quote the gauge, a measure of expected swings in exchange rates, as part of options prices.

The rupee has jumped 7.8 percent to 63.8550 a dollar since reaching an unprecedented 68.845 on Aug. 28, 2013, which was just days before Rajan took over the reins of the Reserve Bank of India. That’s Asia’s best performance in the period. Global investors borrowing in dollars to purchase rupee assets earned 2.5 percent this year, the best carry-trade return in Asia.
“India is the strongest story on the continent,” said Paul McNamara, an investment director based in London at GAM, a group that has $127 billion in assets. It has “central banker of international renown who is cautiously trying to change the situation. Rajan does have the idea of building the credibility of the rupee.”

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