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Foreign investors bail out as G-Secs yield advantage

Indian bonds, which attracted record overseas funds because of their high yields, are losing sheen, as a rise in yields in the US makes it profitable to buy US bonds.

, ET Bureau|
Jun 06, 2013, 05.57 AM IST
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MUMBAI: It may be the beginning of the end of overseas fund flows into rupee debt with global funds selling bonds for ten days on the trot as the higher Indian yield advantage vanishes.

Indian bonds, which attracted record overseas funds because of their high yields, are losing sheen, as a rise in yields in the US makes it profitable to buy US bonds rather than Indian government bonds. In fact, the falling yields of Indian bonds have added to the negative outlook for fund flows.

Foreign institutional investors (FIIs) have sold Rs 11,300 crore worth of bonds in India for ten trading days beginning May 22, the first time since they were allowed to buy fixed income securities in 1998, data from the Securities & Exchange Board of India shows. “There is definitely a problem in the (Indian) debt markets,” said Raj Kothari, fixed income trader with London-based Sun Global Investments, adding, “Most people are on the sidelines now.”

Global money markets are in a turmoil after the Fed chief Ben Bernanke last month said the record stimulus in place since 2008 may taper off. With economic growth beginning to take route, the Fed may reduce the stimulus to prevent inflation getting out of control once demand accelerates.

In May alone, yields on ten-year US treasuries jumped by 56 basis points, from 1.6% to 2.15%, Bloomberg data shows. A basis point is 0.01 percentage point. Whereas yields on ten-year benchmark Indian government bonds have fallen from 8.3% in June last to 7.13 as on May 30. A similar trend was seen in the case of Indian corporate bonds as well. Bond yields and prices move in opposite direction. The gap between the US treasury and India G-Secs has narrowed from nearly 7 percentage points to around 5 percentage points. Global investors usually hedge against currency movements. With hedging cost at about 6.5%, an international investor in Indian bonds will end up losing money. A 2.2% return in US dollars is a more preferred option for FIIs.

“A 30-year Indian government paper gives me 8.3% in rupee, while a dollar bond issued by an Indonesian company can give me more than 7% which has a stable rating and I do not even need to hedge,” Kothari said. “So why should I put money in the Indian paper, where even the hedging cost is on the rise?” he added. The RBI has cut key rates by almost 125 bps since April last and faltering economic growth may push it to cut rates further.

Economists at Deutsche Bank and Barclays expect rate cuts to accelerate as inflation is at acceptable levels which may further dent the attractiveness of Indian bonds. “The RBI has to concede that inflation worries are dissipating rapidly, at least for the duration of this year,’’ said Taimur Baig at Deutsche Bank. “The central bank will be compelled to cut rates by data developments,’’ he added.
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