 "Rajan rate cuts nearing end, spur flight from Indian gilt funds")
A three-month rally in government bonds has stalled as inflation accelerated at a faster-than-estimated pace in April amid higher food and oil prices. Investors are shifting focus to the June-September monsoon rains, forecast to be above-normal this year after two successive droughts. The seasonal showers could boost farm output, raise incomes and spur demand, limiting the extent to which economic growth relies on central bank stimulus.
"When you've seen 150 basis points of rate cuts come in, it's not really possible to be bullish in a big way," said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds Management Co, which oversees Rs 990 crore ($148 million). "Some more outflows may happen at a slower pace as investors probably are shifting to the products or funds that have a more expanded profile."
Rajan wants to limit price gains to five per cent by March 2017, as he looks to monsoon rains to determine whether he has room to add to five interest-rate cuts since early 2015. He cut the repurchase rate to a five-year low of 6.50 per cent on April 5 and took steps to improve banking-system liquidity. Consumer prices rose 5.39 per cent in April from a year ago, a report showed on Thursday, exceeding the median 5.05 per cent forecast in a Bloomberg survey and rebounding from March's six-month low. The consumer food price index climbed 6.32 per cent, after a 5.21 gain in March, led by a 34 per cent surge in prices of pulses. The monsoon, which accounts for more than 70 per cent of India's annual rainfall, will arrive a week later this year, prolonging a drinking water shortage and delaying planting of crops from rice to cotton and sugar cane, the state weather department said over the weekend.
Asian policy makers are also taking into account uncertainty over the US Federal Reserve's tightening and the impact of China's slowdown. The Bank of Korea Friday left its key rate unchanged for an 11th consecutive month as a newly composed board opted to monitor economic data and the progress of corporate restructuring before acting. Indonesia paused its easing last month.
The yield on Indian sovereign bonds due January 2026, the current 10-year benchmark, rose one basis point to 7.46 per cent on Monday, set for its highest close since April 27. It climbed the most in three weeks on Friday, following the higher-than-estimated inflation reading. The yield has risen two basis point in May after sliding 20 basis points in the previous three months.
IDFC Asset Management Co is bullish on notes with maturities ranging between two and seven years, which it sees benefiting more from the central bank's cash infusions.
"It's reasonable to assume that majority of the duration rally is over as the RBI's rate cut cycle is approaching an end," said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset that oversees about Rs 52,300 crore of assets, referring to bonds due in 10 years or later. "The opportunity is more compulsive at the shorter end."
'Less favorable'
Local investors put in a net Rs 760 crore into gilt funds in the financial year ended March 2016, about a 10th of the inflows worth Rs 7,710 crore seen in the previous 12 months, Amfi data show. Fixed-income funds took in Rs 14,740 crore, triple the previous period.
"Investors in gilt funds benefit when there are expectations of a sharp decline in interest rates, which isn't the case now," said R K Gupta, New Delhi-based managing director at Taurus Asset Management Co, which oversees Rs 3,950 crore. "That's the reason these funds are becoming less favorable."