Indian bonds most attractive in APAC

Mumbai: The Indian benchmark bond is the highest-yielding sovereign security in the Asia-Pacific region, barring that of Pakistan, enticing investors to invest in local debt paper. Foreign portfolio investors (FPIs) turned into net buyers of bonds in August after a hiatus of six months as the RBI aims for a positive real interest rate amid slowing inflation in the US.

Indian benchmark paper yielded 7.27% Thursday, ranking 14th in a pack of 15 countries in the Asia-Pacific region, show Bloomberg data. Pakistan, plagued with economic woes, is yielding 12.84% and is not technically comparable with India. Pakistan has total foreign exchange reserves of about $15 billion versus India's $574 billion.

"With US inflation falling, FPIs are likely to extend their beeline for India but not aggressively until India's real rate turns positive," said Madan Sabnavis, chief economist at Bank of Baroda. "In between, falling oil prices, if sustained, will help narrow our trade deficit."

"This in turn, should add to India's fundamentals luring overseas debt investors," he said.


In August, FPIs turned net buyers of local debt securities for the first time since January when they invested a net $698 million, show data from NSDL, a depository. Overseas investors have invested a net $200 million so far this month. "A combination of factors will likely prompt global investors to restart allocating resources for Indian bonds," said Lakshmi Iyer, chief investment officer, debt, Kotak Mutual Fund. "While the RBI will continue to tighten rates, albeit at a slower pace maybe, absolute yields are now looking attractive, with an evolving carry trade opportunity."

Consumer prices in the US rose 8.5% in July versus 9.1% a month earlier. This has convinced investors that the US Federal Reserve will not go in for aggressive rate hikes. The cost of living had hit a 41-year record high in the US.

Indonesian benchmark paper yielded 6.96%, followed by Malaysia's 3.92%.

"The exchange rate too now appears to be stabilising after hitting a lifetime low," Iyer said. The rupee weakened to a record of 80.06 against the dollar on July 21. Since then, the one-month Bloomberg volatility index has dropped 12 basis points to 5.17%. In the same period, the gauge fell just three basis points for the dollar-renminbi pair. A basis point is 0.01 percentage point. "A slowdown in US price rises may cut the Federal Reserve's aggressive rate hikes," said Kunal Sodhani, vice president, global trading centre, Sinhan Bank. "We should see some offshore flows to Indian debt securities with the rupee erasing losses from its lifetime low." The repo rate, at which banks borrow short-term funds, is now at 5.40%. Between May 4 and August 5, the central bank raised the benchmark gauge by 140 basis points. The terminal rate, or peak of the ongoing rate-hike cycle, is expected at 6-6.50%.

Since August 4, a day before the RBI's bi-monthly policy, the benchmark bond yield has surged as much 19 basis points.

One of the real rate definitions points to a differential between the central bank's repo rate at 5.40% and July retail inflation at 7.01%, which is expected to ease well below the 7% level.

India's sovereign credit perception risk decreased following the rupee's recovery after hitting its lifetime low and drop in oil prices, enhancing the likelihood of overseas betting on domestic debt. India's five-year credit default swap (CDS), a gauge for investment risk, has dropped about 21% to 126.65 since July 21, show Bloomberg data.