Top ru­pee bond funds stay bullish dur­ing best March in 13 years

The Financial Express - - MONEY & MARKETS -

Mum­bai, March 28: In­dia’s best-per­for ming debt-fund man­agers are pre­dict­ing more gains for sovereign bonds as bench­mark notes head for their best March in 13 years.

The 10-year yield will drop at least 25 ba­sis points in six months from 7.50% on Mon­day, ac­cord­ing to ICICI Pru­den­tial As­set Man­age­ment and Ko­tak Mahin­dra As­set Man­age­ment Co., which de­liv­ered the first- and sec­ondbest re­tur ns over the three months to March 22. That would add to the 13 ba­sis point drop since Fe­bru­ary 29, which ex­ceeds the big­gest de­cline in any March since 2003. The fore­casts are more ag­gres­sive than the me­dian an­a­lyst es­ti­mate for a three ba­sis point fall by Septem­ber 30.

The rally in bonds is set to break a jinx that had made March the worst pe­riod for In­dian sovereign debt in the pre­vi­ous decade. For­eign in­vestors have tur ned net buy- ers as Prime Min­is­ter Naren­dra Modi’s com­mit­ment to cut the bud­get deficit to a nine-year low com­bined with the most be­nign in­fla­tion in four months. Both lo­cal funds said yields will keep fall­ing as the Re­serve Bank of In­dia low­ers its 6.75% bench­mark rate as much as 50 ba­sis points in 2016.

“There are more legs to the rally,” said Lak­shmi Iyer, who helps over­see $8.25 bil­lion as head of fixed in­come at Ko­tak Mahin­dra. “The gover nment ad­her­ing to fis­cal dis­ci­pline, re­duc­tion in the ad­min­is­tered in­ter­est rates on sav­ings and in­fla­tion re­main­ing sub­dued has led to a rally in bonds. What’s hap­pen­ing is all these have led to an­tic­i­pa­tion that these fac­tors will lead the RBI to cut rates fur­ther.’’

Emerg­ing-mar­ket debt has climbed this month as global growth con­cer ns eased and the Fed­eral Re­serve sig­naled a slower pace for US in­ter­est-rate in­creases. The Bloomberg Emerg­ing Mar­ket Lo­cal Sovereign Index has gained 3.2% in March, head­ing for its best month since 2013.

The Ko­tak Gilt In­vest­ment Prov­i­dent Fund and Trust Plan over­seen by Iyer has re­tur ned 3.46% over three months, the sec­ond-best per­for­mance among mu­tual funds in­vest­ing in medi­u­mand long-term sovereign debt with at least $100 mil­lion in as­sets, ac­cord­ing Value Re­search In­dia. The ICICI Pru­den­tial Gilt Fund is the top per­for mer in the cat­e­gory with 3.48 %.

The gover nment in­di­cated in Fe­bru­ary it will keep the deficit tar­get at 3.5% of gross do­mes­tic prod­uct, the lowest since March 2008. Con­sumer­price in­fla­tion­slowed to 5.18% in Fe­bru­ary, data showed March 14.

In­dia’s 10-year yield­fell to 7.50% in Mum­bai on Mon­day, set for its lowest close since July 2013. Ru­pee sovereign debt has gained 1.8% so far this month, the most since Septem­ber. Lo­cal mar­kets were shut Thurs­day and Fri­day for pub­lic hol­i­days.

RBI gover­nor Raghu­ram Ra­jan has kept in­ter­est rates on hold since Septem­ber and said last month that a pru­dent bud­get as well as con­tained in­fla­tion were pre-req­ui­sites for fur­ther eas­ing. He also said that the econ­omy showed signs of weaker mo­men­tum, “pulled down by slack­en­ing agri­cul­tural and in­dus­trial growth,” ac­cord­ing to a state­ment on Fe­bru­ary 2.

Ra­jan, who re­duced bench­mark bor­row­ing costs by 125 ba­sis points in 2015, next re­views pol­icy on April 5.

“In­fla­tion in In­dia will be an­chored well around 5%,” said Rahul Goswami, chief in­vest­ment of­fi­cer for fixed in­come at ICICI Pru­den­tial As­set Man­age­ment, which man­ages ` 1.7 tril­lion ($25.5 bil­lion). “The cen­tral bank has scope for low­er­ing the bench­mark rate” amid global de­fla­tion­ary pres­sures and weak com­mod­ity prices, he said.

Growth head­winds

Goswami said he favours quasi-gover nment bonds such as state debt and longter m sovereign se­cu­ri­ties. Growth faces sev­eral chal­lenges such as “lower ca­pac­ity util­i­sa­tion, weak ru­ral de­mand, non-per­for ming as­sets and global eco­nomic head­winds,” he added.

The outlook for fur­ther rate cuts and an eas­ing in global mar­ket tur moil has brought for­eign in­vestors back to In­dian debt. Global funds boosted hold­ings of gover nment and cor­po­rate notes by ` 44.9 bil­lion in the past two weeks, Na­tional Se­cu­ri­ties De­pos­i­tory data show. That’s helped take net in­flows for March to ` 24.7 bil­lion, af­ter last month saw with­drawals of ` 87.6 bil­lion that were the big­gest since April 2014.

Bets the RBI will add to stim­u­lus have also in­creased af­ter the Modi ad­min­is­tra­tion re­duced rates on staterun sav­ing plans, said Ko­tak’s Iyer. The gover nment’s move seeks to ad­dress con­cer n that the higher re­tur ns on state-run sav­ing plans tend to can­ni­balise bank­ing sys­tem de­posits and thus pre­vent lenders from trans­mit­ting re­duc­tions in the RBI’s bench­mark re­pur­chase rate to cus­tomers.

“Most of the un­cer­tain­ties such as the bud­get and the Fed meet are out of the way and we don’t think in­fla­tion will throw a neg­a­tive sur­prise,” said Iyer, who sees in­fla­tion slow­ing to RBI’s 5% tar­get. “The way all the fac­tors are shap­ing up sug­gests a be­nign outlook for In­dian bonds.” Bloomberg

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