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Buy India trade gets hotter as RBI’s dovishness boosts inflows

LiveMint logoLiveMint 13-06-2017 Kartik Goyal

Mumbai: A dovish central bank is one more reason for global investors to buy India.

Demand for local assets is rising after the Reserve Bank of India (RBI) last week lowered its inflation forecasts for the year ahead. With data Monday showing gains in consumer prices slowed to a record in May, the RBI’s move is viewed as a precursor to an interest-rate cut, which Deutsche Bank AG and Morgan Stanley Investment Management say could draw even more funds to the nation’s stocks and bonds.

“Foreign investors will welcome a more dovish stance and we would expect the market to start pricing in significant rate cuts over the next 12 months if the inflation backdrop continues to be benign,” said Jens Nystedt, a New York-based portfolio manager at the Morgan Stanley unit that oversees $421 billion. “Against the current yield-seeking backdrop, prudent RBI cuts would probably bring local bond yields lower, prompting further inflows.”

Overseas holdings of rupee-denominated government and corporate debt climbed Rs148 billion ($2.3 billion) last week, the most in two months, as the RBI cut its inflation projections while keeping key rates unchanged. That spurred a rally in sovereign bonds, with the benchmark 10-year yield closing at its lowest since February on Friday. Standard Chartered Plc sees additional inflows of $6 billion into government bonds this year, according to an 8 June report.

Easing bets are also boosting sentiment in the equity market, where Indian companies’ faltering earnings growth and a potential Federal Reserve rate hike have been concerns for investors. Overseas funds bought a net $322 million of local shares on 8 June, a day after the policy, the biggest inflow in almost three weeks. They are still net sellers for the month.

“The RBI has a big credibility store in the eyes of the market,” said Caroline Gorman, a London-based investment manager at GAM International Management Ltd. “Holding policy rates steady rather than rushing to cut at the June meeting has added to this credibility. I expect very little negative impact on India’s financial markets if the RBI makes an August cut against a backdrop of higher Fed rates.”

A pickup in inflows should augur well for the rupee, which weakened 0.4% in May, hurt by seasonal factors and as political turmoil in the US soured sentiment toward emerging-market currencies. The decline put an end to the rupee’s longest stretch of monthly gains since 2007.

The scope for “future responsible easing has boosted both bonds and equity markets, and should be constructive for portfolio inflows, which should keep pressure on the rupee to appreciate,” Deutsche Bank analysts led by Sameer Goel and Swapnil Kalbande wrote in a 9 June report. “The currency has historically been very correlated to the stock market, which is continuing to press to fresh high, and large unhedged bond inflows this year have added to the pie.”

While an RBI easing risks narrowing the spread Indian notes offer over Treasuries, analysts say the Asian nation’s relatively high real rates provide enough buffer for the central bank to act without hurting the attractiveness of rupee debt.

“Given the high nominal yield available in India and the current yield-seeking nature of the markets, we would expect both the rupee and bonds to remain well supported by prudent rate cuts,” said Nystedt of Morgan Stanley Investment Management. Bloomberg

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