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

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