Indian bonds could be the next frontier

MUMBAI: Foreign investor holdings of Indian corporate bonds have slumped to a 19-month low, despite world-beating economic growth and yields close to 8%. That’s a situation that may not last in a planet being taken over by negative interest rates.

Overseas funds had used about 65% of their overall US$51-billion cap for corporate debt holdings as of Aug 25, down from 73% at the start of the year and the lowest since January 2015, according to data from National Securities Depository Ltd. Top-rated 10-year company notes in India pay 7.81%, compared with 3.46% in China. Those rated AA have a yield of 8.38%.

“India is an irresistible destination for foreign investors given the negative yields elsewhere in the world,” said Killol Pandya, the Mumbai-based head of fixed income at Peerless Funds Management Co, who sees holdings climbing back to 75% of the limit by next March. “Relatively higher yields on corporate bonds and the uptick in the Indian economy will result in foreigners returning.”

The outlook for India’s $2-trillion economy has improved after Prime Minister Narendra Modi took steps to lure foreign investment, cut red tape and build infrastructure. Aberdeen Asset Management says a new goods and services tax (GST) and the appointment of deputy governor Urijit Patel as central bank chief highlight the reform drive.

“India is on the path of positive structural reform that will lower both credit and inflation risk premiums and increase productivity that allows for rupee appreciation,” said Leong Lin-Jing, Singapore-based investment manager at Aberdeen, which holds $11 billion of emergingmarket assets. “Indian bonds are a good asset class.”

The rupee has climbed 2.4% in the last six months against the dollar and its three-month implied volatility plunged to 6.19% from last year’s high of 10% about 12 months ago. Gross domestic product expanded 7.6% in the year to March 2016.

Money managers are regaining their appetite for riskier markets. Pacific Investment Management Co said in a report this month that as commodities stabilise and investors hunt returns, it is favouring emerging-market currencies that offer high yields.

With 30% of global government yields now in negative territory because of monetary easing, BlackRock Inc says it sees a “new investment paradigm”.

“I would expect the high yield offered by rupee-denominated bonds to attract incremental flows in views of the increasingly negative global yield environment,” said Pierre Faddoul, head of credit research at Tokio Marine Asset Management International in Singapore.

“The passing of the GST bill could be viewed by international investors as a sign of commitment to reform and fiscal consolidation, both of which are bond-positive.”