Rupee debt lures funds as analysts predict best returns

The strongest export growth in 11 months and forecasts that the rupee will deliver the best returns in the world are luring investors to India’s local- currency debt.

Exports jumped 50 per cent in February, outpacing a 21 per cent increase in imports, Trade Secretary Rahul Khullar said on March 10. Dollar-based investors will earn 11.4 per cent on the rupee for the remainder of this year when including interest, compared with 10.2 per cent for the Turkish Lira and 10.1 per cent for South Korea’s won, according to the median estimates of strategists in Bloomberg surveys.

Global investors raised their holdings of Indian debt by $3 billion to $20.7 billion this year, attracted by central bank interest rates that have risen the most among BRIC nations in the past year. India’s policy rate of 6.75 per cent, which matches Indonesia’s, is the highest among Asia’s 10-biggest economies.

“India’s yield levels are high, making India’s assets attractive,” Takahide Irimura, head of emerging-market research in Tokyo at Kokusai Asset Management Co., said in an interview on March 14. The firm oversees about $55 billion, including Asia’s biggest debt fund. “Bond markets have already priced in further rate hikes, limiting the risk of a drop.”

Bond yields
The Reserve Bank raised its repo rate, at which it lends, by 25 basis points today, according to an e-mailed statement today. All 26 economists in a Bloomberg survey forecast a similar increase.

The central bank has lifted the rate 175 basis points, or 1.75 percentage points, since it started boosting borrowing costs in March last year.

“We’re overweight the market,” Kenneth Akintewe, a Singapore-based portfolio manager at Aberdeen Asset Management Plc that oversees $287 billion, said in an interview on March 15. ”

The yield on India’s 7.8 per cent bond due May 2020 was little changed at 7.96 per cent today, according to data compiled by Bloomberg.

The rate has climbed from this month’s low of 7.94 per cent after official data this week showed wholesale-price inflation accelerated to 8.3 per cent in February from 8.2 per cent the previous month.

The “robust” growth in exports will help narrow the current-account deficit to 2.5 per cent of gross domestic product from last year’s 2.9 per cent, the RBI said today. India will export $200 billion worth of goods and services in the year to March 31, after shipping $164.5 billion in the prior 12 months, Khullar, the top bureaucrat in the commerce ministry, told reporters in New Delhi on November 15.

Finance Minister Pranab Mukherjee doubled the cap on foreign ownership of corporate bonds last month to spur investment in roads, railways and power plants. He set the ceiling at $40 billion and raised the portion available for infrastructure bonds five-fold to $25 billion.