good time to overweight Indian sovereigns

Added 19th March 2015

Reform efforts in India could lead to an upgrade in the country’s sovereign rating, and further rate cuts could raise portfolio valuations, according to Philippe Jauer, chief investment officer, Amundi Asset Management.

good time to overweight Indian sovereigns

A favourable macro-economic environment, prudent monetary policy framework, government reform drive and easing inflation are some of the factors fuelling interest in Indian government bonds, Singapore-based Jauer said in an interview with Fund Selector Asia.

“We are overweight on Indian government bonds. We believe there is a lot of value in the local bond market and we want to [benefit from] the [expected] interest rate cuts in India,” he said.

Sovereign bond upside?

The fund house seeks exposure to potential upside through its Indian bond product, which invests in both rupee-denominated bonds and dollar-denominated issuances from Indian companies. It also uses hedging strategies to maximise the portfolio yield.

Jauer is bullish on Indian sovereign bonds because he believes the reform initiatives could potentially lead to an upgrade in the country’s sovereign rating while further cuts in interest rates could boost the portfolio valuation.

Local media recently reported that India’s finance ministry officials have met representatives from Fitch Ratings and made a case for upgrading India’s sovereign rating.

Moody’s on 11 March retained its stable outlook on the sovereign rating at Baa3. Moody’s said the rating could change if there is economic growth accompanied by an improvement in fiscal, inflation and balance of payments metrics and reduction in infrastructure bottlenecks. 

“India’s sovereign rating should be stable or it could get upgraded. We like to buy seven-to-ten-year tenure government bonds. We are overweight on this segment due to further RBI rate cut expectations.”

Currently, 50-60% of the portfolio is deployed in Indian bonds with a maturity of six-seven years. 

In corporate bonds, Amundi’s strategy is to buy rupee-denominated corporate debt and reduce allocations to the US dollar-denominated issuances.

Amundi is managing the Indian bond product in association with SBI Mutual Fund, its asset management joint venture partner in India.

“SBI Mutual looks after the local bond market. On our side, we are managing the US dollar-denominated debt. We invest in Indian issuers issuing bonds in US dollars. We hedge these bonds into Indian rupees through the NDF [non-deliverable forward contract]. That is a good way to have good yield.”

Interest rate forecasts

Even though the Reserve Bank of India has cut its policy rate twice since January, Jauer expects the central bank to come up with at least two more rate cuts by the end of the year.

The RBI slashed the repo rate -- the rate at which it lends money to commercial banks -- by 25 basis points to 7.5% on March 4, a few days after the government presented its union budget. This brings the total rate cut to 50 basis points since January.

The January rate cut was expected because inflation was lower, he said. “The recent cut was not expected by the market participants including Amundi. The market was expecting the cut only at the 7 April meeting.”

The second rate cut shows that the RBI is working in conjunction with the government, he said.

Jauer believes another rate cut of 25 basis points could come in June, followed by an additional one before the end of the year. 

If the price of oil stays below $60 and food prices do not increase, a third rate cut is even likely, he said.

Fixed income challenges

India’s capital market regulator, the Securities and Exchange Board of India, along with the RBI and the ministry of finance, have taken steps to make it easier for foreign investors to access the Indian fixed income market. 

But there are still some difficulties, Jauer said. India caps total foreign investment in government securities at $30bn. That limit has been reached, hindering further investment.

“Over the last three years, investing in Indian market has become simpler compared to how it was a few years ago.”

“[But] it is still quite cumbersome to invest in India because of the quotas. We would appreciate having more flexibility to buy Indian bonds. All the quotas for the government bonds are nearly full. It is still difficult to buy.”

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