Indian Bonds Lure Investors Despite Emerging-Market Jitters

Rupee-denominated bonds have lately been the best performers in Asia, excluding Japan, as far as major local-currency debt. ENLARGE
Rupee-denominated bonds have lately been the best performers in Asia, excluding Japan, as far as major local-currency debt. Photo: Bloomberg News

When India opened a window this week to allow foreign investors to buy about $ 2.5 billion worth of its government bonds, investors lapped up most of the offer in just two days.

This rush comes at a time when global investors have been generally jittery about emerging-market debt, though they are still eager to buy investments with high yields.

“India, with improving economic fundamentals, improving growth…still remains a fairly attractive yield story,” said Suhas Ketkar, co-manager of the Ashburton India Fixed Income Opportunities Fund.

India’s benchmark 10-year government bond yields around 7.5%, offering a more lucrative return to investors than similar bonds from China and Malaysia, where benchmarks yield 4% or less. And the Reserve Bank of India’s moves to cut interest rates four times this year has helped to support bond prices.

Though yields in some other major emerging markets are higher—Brazilian bonds yield nearly 16% and Russian bonds are at 10%—investors are more optimistic about India’s economic story.

Also, India’s rupee has fallen less against the U.S. dollar this year when compared with some other countries’ currencies.

“The global backdrop calls for a little bit more cautious approach as opposed to simply buying high yield,” said Neeraj Seth, co-manager of the BlackRock Asian Tiger Bond Fund. At the moment, India offers the “safe yield” that investors are looking for, Mr. Seth said.


So far this year, rupee-denominated bonds have been the best performers in Asia, excluding Japan, among major local-currency debt, with a total return of 4.8% in U.S. dollar terms, according to the HSBC Asia Local Bond Index, a benchmark of local-currency bond performance in the region. Some frontier markets such as Pakistan and Bangladesh posted greater than 8% returns on their U.S. dollar bonds so far this year, according to J.P. Morgan Asia Credit Index, though their bonds are less liquid and are traded by fewer investors.

Unlike other emerging countries that are large commodity exporters, India is benefiting from a decline in global oil prices because it imports about 75% of its oil. As a result, its trade deficit has shrunk.

The country’s economy is ticking up. The International Monetary Fund expects India’s economy to grow 7.3% in the financial year that ends March 31, though analysts attribute a part of that to a recent change in the way India calculates its growth.

Meanwhile, inflation has been easing. In a surprise move late last month, India’s central bank cut its benchmark interest rate by half a percentage point and indicated that it could cut further if inflation was under control. Bond prices rise when interest rates fall.

“We are also pretty confident towards its reform plans. India bonds have been our most favored Asia local-currency bonds since the beginning of this year,” said Ben Yuen, head of fixed-income at BOCHK Asset Management Ltd. in Hong Kong. “It’s not surprising to see new quota for foreign investments being used up so quickly,” he said.

Mr. Yuen’s fund owns rupee-denominated bonds sold by issuers such as the World Bank.

A laborer carried a sack of cement with Mumbai’s financial district in the background in 2013. ENLARGE
A laborer carried a sack of cement with Mumbai’s financial district in the background in 2013. Photo: Reuters

Globally, bond investors have been anxious in recent weeks, as they wait for the U.S. Federal Reserve to raise rates. Investors have pulled out of emerging-market investments partly to benefit from the Fed rate increase, but also because they are worried about a slowdown in China and other emerging countries.

Investors pulled an estimated $ 21 billion out of emerging-market debt in the third quarter, according to the Institute of International Finance. India, however, hasn’t seen a selloff during this period.

In the first nine months of this year, global investors poured $ 7.9 billion into Indian debt, according to data from the National Securities Depositary Ltd. During this period, Indonesia has received a net $ 5.5 billion and investors pulled $ 1.4 billion out of Thailand, according to IIF data.

India’s bond market is relatively closed to foreign investors.

Unlike Russia and Indonesia, which issue dollar-denominated bonds, India doesn’t issue sovereign debt outside the country. Also, it restricts the amount of rupee-denominated debt that foreign investors can own to a small amount, in part because it doesn’t want to be beholden to swings caused by global market uncertainty.

In recent months, Indonesia and Malaysia, where foreigners can own more than 30% of all outstanding local-currency debt, have struggled as foreign investors pulled out.

Of the 42 trillion rupees ($ 646 billion) in outstanding Indian government debt, foreign investors until last week owned about 3.7%.

In late September, the Reserve Bank of India said it would raise the quota of foreign debt investment in phases, to about 5% of total outstanding government debt by March 2018.

The first increase in the quota came on Monday.

In an auction to sell the right to buy 56 billion rupees worth of bonds, investors put in bids to buy about 172 billion rupees worth. Investors agreed to pay a higher fee than they did for similar purchases earlier in the year, according to BSE Ltd., a Mumbai stock exchange which conducted the auction.

In three days, foreign investors have almost entirely used up their limit for new purchases, according to data from the National Securities Depositary Ltd.

India “is still one of the stories we like in the next 12 months,” said Gordon Rodrigues, head of Asian rates and FX at HSBC HSBC -0.10 % Global Asset Management, which was among investors who bought rights for these bonds.

Starting on Monday, India also allowed—for the first time—foreign investors to buy so-called state development loans, which are issued by state governments.

Yields on these bonds are around a quarter percentage point higher than sovereign bonds, as they are considered to be slightly riskier. But in a sign of foreign investors’ eagerness, they have already bought 80% of the 35 billion rupees ($ 540 million) worth of these bonds that became available to them this week.

“You do get spillover demand,” said Mr. Seth of BlackRock.

Write to Shefali Anand at [email protected] and Fiona Law at [email protected] Markets

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