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Franklin Templeton leads foreign bets on India bonds as local investors see losses

LiveMint logoLiveMint 29-03-2017 Kartik Goyal

Mumbai: Franklin Templeton Investments and other foreign funds are piling into Indian bonds after Prime Minister Narendra Modi’s key election victory. That’s pitting them against local naysayers who predict that benchmark securities will post their first loss in four years.

Buoyed by expectations of more economic reforms and an appreciating currency, overseas investors have poured Rs23,720 crore ($3.6 billion) into government and corporate rupee bonds in March, the most since January 2015. Domestic traders and money managers say a glut of new bond sales and the central bank’s shift away from easing will see prices slide by the year-end.

The benchmark 10-year yield will rise to 7.1% by 31 December, according to the median estimate in a Bloomberg survey of market participants from 18 banks, primary dealers and asset managers. That compares with a level of 6.71% Monday and 6.52% at the end of 2016, which marked a third straight year of declines for the yield.

“It’s getting increasingly hard to stay bullish on Indian bonds, as a lot of headwinds are converging,” said Tushar Arora, a senior economist for treasury at HDFC Bank Ltd, India’s largest lender by market value. His yield forecast of 7.3% is the highest among survey participants.

The 10-year yield jumped 46 basis points last month, the most since July 2013, after the Reserve Bank of India unexpectedly signaled an end to its monetary easing cycle. An increased supply of state-government bonds that offer higher yields is seen hurting appetite for sovereign debt. At the same time, demand from local banks, the biggest holders of the securities, is also expected to dwindle as the flood of cash deposited with lenders following Modi’s currency-note ban flows back into the real economy.

“The outlook on government bonds has turned cautious and we don’t foresee any rally in the near term,” said Dhawal Dalal, chief investment officer for debt at Edelweiss Asset Management Ltd. “We have been advising investors to calibrate their expectations on returns from the bond market. Yields may remain sticky with an upward bias.’’

State-run banks looking to lock in treasury gains before the financial year end were sellers of government bonds for seven straight days through 22 March, offloading a net Rs17,600 crore in the period. In contrast, foreign banks bought Rs19,400 crore of bonds in those days, according to data from the Clearing Corp. of India Ltd.

For overseas investors, India offers one of Asia’s highest yields and an economy that boasts one of the fastest growth rates among major countries. Modi’s majority win in Uttar Pradesh, the nation’s biggest state, is seen emboldening him to take more measures and has propelled the rupee to become the region’s best currency this month, adding to the appeal of local assets.

Franklin Templeton Investments bought about Rs8,000 crore of local government bonds in two days last week, a person with knowledge of the matter said. The purchases made were largely for tenors maturing over 2021-2023, said traders who asked not to be identified because they aren’t authorized to speak publicly.

‘Attractive opportunity’

India’s 10-year yield has climbed 19 basis points so far in 2017, after sliding 231 basis points over the last three years. Investors have lost 0.4% on rupee sovereign bonds this year, indexes compiled by Bloomberg show. The securities delivered emerging Asia’s best returns in each of the last three years.

Foreigners are expected to pour in with funds that will help bridge a widening current account deficit, as Modi encourages direct investments. And for investors in emerging markets, India is also seen as relatively immune to the effects of any potential protectionist measures taken by the US administration.

Mirae Asset Global Investments Co., a money manager overseeing $90 billion worldwide, forecasts the 10-year yield to slide to 6.25% by 31 December.

“India’s bond market offers an attractive opportunity for global investors in terms of the real yields,” said Kim Jinha, Seoul-based head of global fixed income at Mirae Asset. “We are currently at the maximum capacity for rupee bonds. Unlike other export-driven countries, India’s reliance on foreign trade is relatively limited.” Bloomberg

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