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Merrill, Franklin buy government debt

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Bloomberg Mumbai
Last Updated : Feb 05 2013 | 1:05 AM IST
Merrill Lynch & Company and Franklin Resources are increasing purchases of Indian government debt, predicting the central bank will end 2 1/2-years of interest-rate increases.
 
DSP Merrill Lynch Fund Managers, a unit of New York-based Merrill, last week raised Rs 280 crore ($68 million) for its first Indian bond fund since 2002. Franklin Templeton India, part of the San Mateo, California-based money manager, doubled holdings of benchmark debt in one of its funds in March.
 
"India is now closer to a peak in interest rates,'' said Dhawal Dalal, who manages the equivalent of $1.3 billion of debt at DSP Merrill in Mumbai. "The time is probably right for investors to start considering bond funds," he added.
 
The increase in demand for the securities may bolster prices for Indian bonds, which have slumped since 2004. Bond investors' returns have been eroded after faster growth caused inflation to accelerate and pushed yields on government debt to the third-highest in Asia.
 
The yield on the benchmark 8.07 per cent note due January 2017 rose 17 basis points, or 0.17 percentage points, in April, to 8.17 per cent, close to a 4 1/2-year high of 8.4 per cent. The price fell 1.1 rupees per 100-rupee face amount to 99.32. Only Pakistan and Indonesia have higher 10-year yields in Asia.
 
The yield will drop to 7.5 per cent by year-end, said K Ramkumar, who manages the equivalent of $1.3 billion in debt at SBI Funds Management in Mumbai. That would give investors a 9.7 per cent return.
 
"The year 2007 is the year of debt,'' said Ramkumar. "There will be one more monetary tightening measure.'' SBI is part of State Bank of India, the nation's biggest lender by assets.
 
Prime Minister Manmohan Singh's economic policies have helped boost growth in Asia's fourth-largest economy for three years, prompting India's benchmark Sensex stock index to almost triple and driving borrowing costs higher.
 
Indian bonds were the worst performers among 10 Asian local-currency bond markets outside of Japan during the past three years, according to London-based HSBC Holdings. Indian bonds have returned 3.07 per cent in the three years ending April 27. Hong Kong debt was the second-worst, returning 8.8 per cent.
 
Growth in India, which trails only China among the world's 20 biggest economies, may slow to 8.5 percent in the year ending March 31 after expanding 9.2 per cent last fiscal year, according to the Reserve Bank. Inflation will slow to 5 percent this year, after reaching an annual rate of 6.1 per cent in mid-April, the bank forecasts.
 
The central bank, led by Governor Yaga Venugopal Reddy, kept the overnight lending rate unchanged at 7.75 per cent on April 24. The Reserve Bank has raised its benchmark rate nine times since October 2004. Only four of eleven economists in a Bloomberg News survey predict an increase in the repurchase rate by the next meeting in July 31.

 
 

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First Published: May 08 2007 | 12:00 AM IST

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