Global funds have poured money into India’s debt market for 14 weeks in a second streak of buying this year, evidence of the country’s appeal amid the ructions of worldwide financial markets.
With the prospect of interest rate cuts on the horizon and the rupee treading water near historic lows, offshore investors have bought roughly $7 billion net of the South Asian country’s bonds since May. That’s more than twice the sum of net purchases for Indonesia, to which it is often compared, according to data compiled by Bloomberg.
The flow of money into India, the world’s fastest-growing major economy, has been so strong that officials even moved to temper the enthusiasm — albeit to little avail. The country’s securities — which recently joined a key JPMorgan Chase & Co. gauge — are some of the best performing in Asia this year.
“India is in a sweet spot from a macro perspective and also from a monetary policy perspective,” said Jenny Zeng, chief investment officer for Asia Pacific fixed income at Allianz Global Investors Apac Ltd.
Zeng is investing in five-year notes, citing the country’s domestic-driven economy. “India isn’t as vulnerable to external shocks as, for example, Indonesia,” she said.
Inclusion in JPMorgan’s flagship emerging bond index was a watershed moment for the Indian market, which the government has long sought to shield from the whims of overseas funds by enacting complex regulation.
A large local investor base and a central bank that’s regularly intervening to stamp out swings in the currency only add to the country’s appeal. This has grown amid the gyrations of financial markets caused by US politics, war in the Middle East and Japan’s raising interest rates. The lackluster state of China’s economy has also encouraged investors to seek out an alternative.
Foreign investors own only about 3% of India’s $1.3 trillion government bond market. Among emerging Asia currencies, the rupee is one of the least volatile relative to the greenback, Bloomberg-compiled data show.
“Index inclusion is perhaps one factor,” for a positive view, said Manpreet Gill, chief investment officer for Africa, Middle East and Europe at Standard Chartered Plc. “We see bond yields as attractive relative to options available elsewhere in EM, the level of USD bond yields and the stability of INR, which has helped returns hold up well for international investors as well.”
The bonds in the JPMorgan index are part of a special category of Indian debt that’s freely available to foreigners, known as the Fully Accessible Route notes. Just a few weeks after the South Asian country’s securities joined the gauge in late June, the Reserve Bank of India said it would exclude any fresh issuance of notes with maturities of 14 years and 30 years from FAR.
The RBI’s announcement was interpreted as a move to shield the debt market from hot money. But the steady stream of capital has continued — not least because the rule change doesn’t apply to existing securities.
India is “one of the nicest stories in the whole index,” said Carl Vermassen, a portfolio manager at Vontobel Asset Management AG, who has bought bonds with maturities of between four years and eight years. However, with so much focus on India joining the index, the topic is probably a bit over-hyped, given how low foreign ownership actually is, he added.