Schroder Investment Management is turning away from Indian bonds, until recently one of the most sought-after investment destinations in Asia.
The case to own rupee debt is weakening, with surging oil prices threatening to accelerate already-rising inflation and weigh on finances in the region’s third-largest economy, according to Rajeev De Mello, head of Asian fixed income at the asset manager that oversees $563bn globally.
Schroder said it trimmed Indian bond holdings earlier, skirting yesterday’s rout as a surge in the latest consumer prices sent benchmark yields to their highest in 14 months.
Other fund managers have also turned bearish, with the Indian venture of BlackRock Inc dumping rupee notes in October.
“We reduced exposure during the past month,” De Mello said by e-mail. “Inflation is likely to move higher with oil prices,” which “themselves are negative for the Indian fiscal position, through subsidies, and for the currency, through the terms of trade,” he said.
Brent crude’s more than 20% rally since end-August threatens to raise the import bill for India, which buys majority of its oil overseas. It will also feed through consumer prices, which in October rose 3.58% from year earlier, the fastest pace in seven months. The inflation data released late Monday, along with the risk of fiscal slippages, dims hopes of an interest-rate cut by the Reserve Bank of India at its policy decision next month, further denting sentiment in the bond market. The benchmark 10-year yield jumped nine basis points on Tuesday to 7.06%, the highest since September 2016.
“Surging crude prices” have “implications for both the fiscal deficit and the import bill, and that’s weighing on the rupee,” said Sajal Gupta, Mumbai-based head of foreign exchange and rates at Edelweiss Securities.
The rupee slipped yesterday, extending losses from Monday, when it fell to its weakest level in almost six weeks.
Overseas investors have reduced their holdings of rupee-denominated government and corporate bonds for six straight days, with Monday’s outflow at Rs380mn, according to National Securities Depository’s data.
Bond losses accelerated last month – a third straight month of losses, on concern demand for existing notes will shrink because of a government plan to issue special debt to finance state-run lenders. The administration hasn’t ruled out borrowing more during the financial year ending in March.
Schroder’s De Mello predicts yields to rise, saying that consumer inflation is expected to move above the RBI’s 4% medium-term target, and as the move to boost banks’ capital will spur credit growth.
“The recent bank recapitalisation plan should be positive for credit growth and we could expect some more pro-growth initiatives as we get closer to the 2019 general elections,” he said. “Central and state deficits are likely to continue to creep higher.”
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