Global funds say India's simpler rules on bond-market access will accelerate investment, after the strongest quarter for their purchases in a year.
"I had given up on investing in Indian bonds before because of complicated rules," said Lim Kwang Taek, managing director of the fixed-income division at Korea Investment Management Co, which has 25.2 trillion won ($23 billion) of assets under management. "The relaxation will definitely make Korean investors look at the Indian market as low yields at home encourage more funds to buy higher-yielding overseas bonds."
HSBC Global Asset Management and Standard Chartered Plc also see more inflows into rupee debt after Finance Minister Palaniappan Chidambaram said March 23 the government will remove curbs, which include those on the types and maturities of notes that can be bought. Global ownership of local sovereign and corporate notes jumped $2.6 billion since December 31 to a record $35.5 billion on March 21, heading for the biggest increase in four quarters, according to official data.
Indian bonds outperformed those of the largest developing nations this year as Chidambaram achieved his target to reduce the budget deficit for the year ending March 31 to 5.2 per cent and pledged to narrow the shortfall further. 10-year federal securities yield 7.95 per cent in India, compared with 3.59 per cent in China and 2.9 per cent in South Korea.
Restricted entry
Under current regulations, $25 billion of the $75 billion that foreign institutional investors are allowed to bring into the Indian bond market can only be invested in securities issued by companies that build or finance infrastructural projects. In addition, funds can only purchase such notes if they are due after 15 months or more. Foreign buyers need to first acquire investment permits that are auctioned by the market regulator before adding to their holdings of rupee debt.
All foreign holdings will be classified into just two types, government and company debt, and all the sub-divisions will be removed from April 1, Chidambaram told reporters in New Delhi. A new "on tap" allocation method will replace the existing auction procedure, he said. In January, India scrapped tenor restrictions on purchases of sovereign securities and lock-in clauses on some types of corporate bonds.
"The government's step to simplify the investment framework for foreign institutional investors is positive," said Nagaraj Kulkarni, a strategist at Standard Chartered in Singapore.
"Over the medium term, this should result in inflows into Indian local-currency bonds."
'Range of reforms'
The measure is the latest in a series of policy changes by Prime Minister Manmohan Singh's administration since September to revive growth, including opening up industries and markets to foreigners. The government estimates India needs more than $75 billion of foreign capital this year and next to fund the current-account deficit, which rose to an all-time high of $22.3 billion in the three months to September 30.
"It's important in the context of the whole range of reforms that they've done," said Glenn Levine, a Sydney-based senior economist with Moody's Analytics. India's bond market "is not particularly well-developed and it's not particularly open to foreigners," he said, adding that the move will make it easier for investors to manage their portfolios.
An auction of securities-purchase permits to foreigners was oversubscribed on March 20, a day after Reserve Bank of India Governor Duvvuri Subbarao cut interest rates for the second time this year to spur Asia's third-largest economy. The benchmark repurchase rate was lowered by 25 basis points to 7.5 percent, taking reductions in 2013 to 50 basis points.
Higher Yields
Money managers based abroad have boosted their ownership of local debt by almost $28 billion since the end of 2009, data from the Securities and Exchange Board of India show, lured by the region's highest investment-grade yields.
Rupee-denominated five-year corporate debt rated AAA by Crisil Ltd., the local unit of Standard & Poor's, yield 8.96 percent, data compiled by Bloomberg show. Similar notes offer 4.83 percent in China. The yield on the 8.15 percent government debt due June 2022 fell one basis point in Mumbai yesterday, offering an extra 598 basis points over Treasuries, while the rupee appreciated 0.3 percent to 54.18 per dollar.
Indian sovereign notes returned 2.4 percent so far in 2013, compared with the 0.5 percent earned by Chinese securities and a 1.3 percent gain on Russian debt, according to indexes compiled by JPMorgan Chase & Co. Brazil's bonds lost 7.2 percent.
Slower Inflation
The cost of insuring the debt of State Bank of India, considered a proxy for the sovereign, using five-year credit- default swaps slid 185 basis points since the end of 2011 to 210, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
Inflation-adjusted yields on Indian bonds have climbed to near the highest since 2009, boosting their appeal to foreigners.
The so-called real yield on 10-year government debt has added 38 basis points this year to 112, after the pace of annual price increases averaged 6.73 percent in the first two months, compared with 7.23 percent a year earlier. The real yield on 10- year bonds in India has improved from a 2012 low of six basis points in October, as inflation slipped below 7 percent in January for the first time since 2009.
India's inflation is close to peaking and the RBI may lower borrowing costs by as much as 75 basis points in the second half, fueling gains in the local bond market, according to Nicolas Jaquier, an economist in the emerging-markets fixed-income team at Standard Life, which oversees 157.6 billion pounds ($239 billion).
'Listening to Investors'
India's move to simplify investment rules will encourage fund inflows, helping offset the current-account deficit, according to Bank of America Merrill Lynch. Policy makers need to take more steps, such as raising the overall debt-purchase cap or selling dollar-denominated debt to overseas Indians, to attract capital, Indranil Sen Gupta, a Mumbai-based economist at the U.S. bank, wrote in a report yesterday.
Chidambaram is relaxing debt-purchase restrictions in response to feedback from investors received during a tour of Asia and Europe almost two months ago.
The ownership cap on corporate bonds will be reviewed when 80 percent of the current limit is exhausted, he said. The ceiling on government bonds will be enhanced based on "utilization levels, demand from foreign investors, macroeconomic requirements and on prudent offshore and onshore balance," the minister said.
"There is a need to simplify the limit structure and make all the limits fungible, rather than have different reinvestment profiles because those are very tough to maintain," Gordon Rodrigues, investment director in Hong Kong at HSBC Global, which oversees $32 billion of Asian fixed-income assets, said by telephone yesterday. "The fact that they have taken that feedback onboard is in itself very credible from a point of view that they are listening to what investors want."
