Bond rout may not be enough for India to let more foreigners in

As India’s sovereign bonds suffer their worst selloff in almost two decades, the one group who actually wants to buy them looks likely to remain shut out of most of the market.

The Reserve Bank of India is expected to review the cap on foreign investment in rupee notes, currently set at around 5 percent, in March or April. It will be the first reassessment since 2015, and comes as 10-year yields have risen to a two-year high, the budget deficit widens and India’s state-run banks have been dumping the debt.

For all of the reasons to roll out the welcome mat, regulators may still see the risk of hot-money flows destabilizing the rupee as a more potent argument not to. That will disappoint both local investors reeling from losses and foreign asset managers including Ashmore Group and Aberdeen Standard Investments who want more access to Asia’s highest-yielding emerging-market bonds.

“It doesn’t appear they would be too keen to open up the limits very much,” said Ashley Perrott, head of pan Asia fixed income at UBS Asset Management in Singapore. “It’s that balance between allowing better access, but at the same time wanting to stay in control of the fund-flow picture.”
 

An RBI spokesman didn’t respond to an e-mailed request for comment.

At the last review in September 2015, the RBI raised the cap from $30 billion to 5 percent of outstanding debt, with the increase gradually phased in through March 2018. Foreign buyers are required to bid for quotas, with the cap preventing the inclusion of the local notes in global indexes.
 

“The limits on foreign participation in the Indian bond market are obsolete,” said Jan Dehn, head of research at Ashmore in London, who said the asset manager would be keen on buying more of the debt if the cap was raised. “The whole of the Indian economy pays for this policy because an open bond market would lower interest rates across the entire yield curve.”

Despite this, Dehn said he wasn’t anticipating authorities would open up the market significantly. “The government is showing increasing tendencies towards protectionism.”

Teresa John, an economist at Nirmal Bang Equities Pvt., is also expecting a go-slow approach from the RBI. The central bank is likely to be cautious in raising the limits in the face of global market volatility, she wrote in a Feb. 20 note.

India’s 10-year bond yield has risen for the last six months, the longest run since 2000. It’s climbed from a low of 6.41 percent in July to 7.71 percent on Wednesday and surpassed Indonesia as Asia’s highest yielder.

Given the weak local demand, opening up more to foreign buyers is the only way authorities can ease the pressure on bond yields and also aid the rupee, said Sajal Gupta, the head of foreign exchange and rates at Edelweiss Securities Ltd. in Mumbai.

While India would benefit from cheaper access to funding by opening up the market, the relative lack of volatility does make the debt more attractive, said Lin Jing Leong, a Singapore-based investment manager at Aberdeen Standard. The fund manager sees the nation as the best reform story among emerging markets and is hoping for greater access, she said.

“It’s important that the RBI opens up the limits for foreign investors in a significant way to manage the higher supply of bonds next year,” said Vivek Rajpal, a Singapore-based rates strategist at Nomura Holdings Inc. “I don’t know how long they can postpone it. You have to create more buyers.”